Frugal Google

by Russ Roberts on September 18, 2006

in Charity

When Warren Buffett made his massive donation to the Gates Foundation, my father was perplexed. Why would a man who had spent his life understanding the power of the profit motive entrust his money to non-profits who might be more profligate? I suggested that perhaps he was trying to burnish his reputation, that his success as an investor was viewed by some as tawdry. By giving money to a charity, he would look like a nice person, regardless of the outcomes. People would judge him by his motives.

Google is taking a different path, as the New York Times reports:

The  ambitious founders of  Google,
the popular search engine company, have set up a philanthropy, giving
it seed money of about $1 billion and a mandate to tackle poverty,
disease and global warming.

But unlike most charities, this one will be for-profit, allowing it
to fund start-up companies, form partnerships with venture capitalists
and even lobby Congress. It will also pay taxes.

Google probably understands that as Milton Friedman points out, people spend their own money more carefully than they spend other people’s money.

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{ 3 comments }

JMP September 18, 2006 at 12:09 pm

"Google probably understands that as Milton Friedman points out, people spend their own money more carefully than they spend other people's money."

While true, I'm not sure this line touches upon the intent behind the Google founders' actions. They chose not to form a 501(c) non-profit because they did not want to be bound by the onerous restrictions that the tax laws place on the activities of such organizations.

To my mind, however, they *haven't* tackled the fundamental problem of non-profits, which is what your Friedman paraphrase captures. Perhaps the most fundamental problem with non-profit organizations is the absence of that profit motive that provides incentives for efficient investment. I might form a non-non-profit (but not necessarily a "for profit") organization intended to promote the addition of trees to urban areas in the country. It's all well and good that my actions are not limited by federal tax rules; but the question remains as to how, other than my taking pride in being an efficient investor, we can be sure that the money that will be invested by this organization will be put to good use.

Jav September 18, 2006 at 12:41 pm

"Why would a man who had spent his life understanding the power of the profit motive entrust his money to non-profits who might be more profligate"

Maybe Buffett thinks it is not his money anymore once he is dead and gone? or maybe the Gates foundation according to Buffett is not profligate and "won't back too many lost causes"?

Frankly, Gates' foundation is not any different from Google's foundation (except that they have a lot more money) and it'd be very difficult to convince me that Gates will blow all this money on bad projects.

Xmas September 20, 2006 at 5:14 pm

I've been thinking that Buffet's dump of all his worldly gains before he dies is actually another big piss at the small investor he so greatly despises.

By donating all of his money, he avoids the estate taxes he supports for everyone else. It's great news for the Gates foundation and their charity works, but it is several billion dollars in taxes avoided.

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