Philanthropy as Key Ingredient to American Capitalist Economy

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December 5, 2014; San Francisco Chronicle

Ronnie J. Phillips is an economics professor at Colorado State University and an expert in entrepreneurial economics. His take on economics shows in a recent opinion piece that categorizes philanthropy as “the backbone of American capitalism.”

In 2002, Phillips co-authored a piece with Zoltan Acs of George Mason University contending that the combination of entrepreneurship (“the creation of wealth”) and philanthropy (“the reconstitution of wealth”) distinguished American capitalism from other forms of capitalism. The usual theory is that capitalist wealth generates and stimulates philanthropy, but they wrote that philanthropy contributed substantially to American prosperity through knowledge creation and entrepreneurship. It’s a theory that makes sense for Phillips, who has spent time as a research fellow with the Ewing Marion Kauffman Foundation, American philanthropy’s preeminent supporter of entrepreneurialism.

In his new op-ed, Phillips suggests that “Spending and giving stem from very different motives, yet both are crucial to maintaining the vitality of a capitalist economy.” He writes that in addition to entrepreneurial activity, “the other essential component of American economic, political and social stability is philanthropy—that is, distribution of wealth.” In other words, philanthropic altruism isn’t standing in contrast to capitalist self-interest, but altruism, like self-interest, contributes to the creation of opportunity and progress. The excess returns of self-interest that create immense wealth flow into philanthropy, which creates opportunities for future generations.

As a result, Phillips contends, “What is required to sustain American and global capitalism into the 21st century is a renewed spirit of philanthropy among the new rich.” In his view, philanthropy rechannels “the maldistribution of wealth” in American capitalism.

It is an attractive theory, but it requires the belief that philanthropy substantively reflects and supports income redistribution. Given the patterns of philanthropy grantmaking and charitable giving by the super-wealthy, it doesn’t seem that Phillips is actually suggesting that philanthropy results in money going to the poor, as the giving of the wealthy typically goes to entities and purposes that benefit the wealthy. On the Melissa Harris-Perry show on MSNBC, Jennifer Jones Austin of the Federation of Protestant Welfare Agencies engaged Harris-Perry in a discussion of the giving of the wealthy:

Austin: What often happens is, the wealthy are disconnected from the real issues of people who are challenged and are struggling day to day. They’re connected to what they know. They know the schools from which they came, that they believe helped them make it in the world. They know of the opera and the other theatrical activities and events that they enjoy. They want to give back to that. They’re removed from what is happening and the people who need it. They don’t see it. You know, if you were in a car moving from one place to the next, not in the subway or walking the streets of poverty, then you’re not going to see it so you’re not going to feel compelled to give in that regard.

Harris-Perry: I think this is a great point that seems to be borne out empirically, because the wealthy who live in ZIP codes that are economically diverse tend to give more to things like the United Way or Salvation Army. Those who live in zip codes that are economically homogenous tend to give more to their alma maters. And again, no one’s suggesting one should not give to one’s alma mater, but there is a kind of funny tax thing that happens, right? So, I’m not taxed, and then I give to a 501(c)(3), but it’s kind of a 1%-er 501(c)(3), so I give to that, and then I get a tax break for having given to that, but then that still doesn’t move down to the folks who are on the bottom.

Grantmaking by foundations is not exactly the same as charitable giving by the super-wealthy, but even among foundations, few inside or outside of institutional philanthropy would make the case for foundation grantmaking as income redistribution. The point that Phillips is making is that in American capitalism, philanthropy is an instrument for expanding opportunities to different social classes, and in that way, other social classes get knowledge and support for their social and economic advancement. It is an interesting theory, worth discussion as a theory about the distinctiveness of American capitalism, but it would be difficult to make the argument that philanthropy is in and of itself the critical leavener that tempers excessive accumulations of wealth and vaults lower classes up the socio-economic ladder.—Rick Cohen