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Freeman Essay #17: “Bill Gates, Philanthropist”

This January 1998 essay (which appears here below the fold) is not about Bill Gates’s contributions to charitable foundations.

Let’s review the familiar refrains on charitable giving. Social democrats criticize tycoons for not giving more of their wealth to charities. Business people are repeatedly admonished to “give something back.” The implication is that commercial profits are taken from others, and decency demands that the lucky takers return at least part of their booty to those from whom it was extracted. Bill Gates, in particular, has come under increasing fire for not shoveling a substantially greater share of his $40 billion fortune into nonprofit causes.

In this light, Ted Turner’s recently announced gift of $1 billion to the United Nations is widely commended. Among Turner’s admitted aims is to shame other moguls into donating more of their wealth to charities.

Free-marketeers, in contrast, point out that profits are the reward for good and creative efforts. Because profits represent only a small portion of entrepreneurs’ net additions to society’s wealth- -and because no business can profit in the market without contributing at least as much to society as it earns in profits—market advocates note that there is nothing to give back. Profits obtained in the market are earned, never taken.

The free-marketeers are correct. But even many market supporters assert that the greater an entrepreneur’s charitable giving, the more admirable is that entrepreneur. The pro-market Economist, for example, recently hinted none-too-subtly that Bill Gates is less admirable than is George Soros. The reason is that Soros gives away a much larger share of his wealth to charities than does Gates.

The Economist is wrong to deride Gates.

In fact, if Bill Gates gave away a larger portion of his wealth to charities he would likely reduce the welfare of others rather than increase it. (Gates is just one example. Everything said about him here applies to all successful entrepreneurs.)

When discussing Gates’s $40 billion fortune, people imagine something like the following: If Gates would spread, say, three-quarters of his wealth around to the poor, to colleges, and to nonprofit foundations, each of these groups would be much better off, while Gates himself would still have a tidy $10 billion in his bank account! Because $10 billion quite adequately provides a lifetime of luxurious living, Gates is inexcusably greedy for not giving away a hefty chunk of his wealth.

The trouble with all of those who imagine this scenario is that they mistakenly assume that Gates consumes his entire fortune. It’s true that if Gates liquidated all of his portfolio he could gorge himself on tens of billions of dollars worth of consumption goodies. Like most wealthy people, however, he doesn’t do that. Contrary to media insinuations, Gates doesn’t have $40 billion in cash or in his checking account. While he may spend several million dollars annually for his own consumption, the vast bulk of his assets is invested in Microsoft stock.

And it’s because the vast bulk of his fortune is in Microsoft stock that Gates would likely harm society if he were stricken with an acute spasm of generosity and gave away a large bundle of his fortune. Here’s why.

Gates is phenomenally good at pleasing consumers – that is, at creating wealth for others. His proficiency at this vital chore is proven by all the recent caterwauling by Microsoft’s rivals who are irritated that they must compete against this mighty consumer pleaser. If Gates and Co. were sufficiently inefficient, Netscape, Novell, and other rivals of Microsoft wouldn’t howl endlessly to the government and to the press for pity.

What Bill Gates and Microsoft do uniquely well is to produce and market computer software. If Gates were to liquidate, say, $30 billion of his stake in Microsoft and give this sum to nonprofit causes, he would take an immense amount of capital out of a firm with a long record of creating wealth. Gates would withdraw $30 billion of assets from what he is proven to do best.

Because Gates could live just as well on $10 billion as on $40 billion, his personal standard of living wouldn’t change. But the standard of living of the rest of us would fall. Society would be poorer with $30 billion of assets taken from Microsoft. To see why, ask what would happen to the wealth of the nation if, say, a gifted neurosurgeon liquidated his physical assets—his scalpels, his diagnostic machines, his examining rooms—and gave the resulting monies to the Sierra Club or to United Nations agencies.

Administrators at these agencies would be better off, but society would be poorer because this gifted neurosurgeon stripped himself of the tools he needs to do for others what he is proven to do best.

But isn’t it possible that agencies receiving the neurosurgeon’s charity will employ this money to produce at least enough wealth to offset the reduction in the supply of neurosurgery?

It is possible for nonprofit foundations to use these funds as productively as when they are used for neurosurgery. But this happy outcome is unlikely. Most nonprofit foundations are unable to measure the effectiveness of what they produce. Some nonprofits, no doubt (such as FEE!), produce great bang for the buck. But too many nonprofits – especially those actively seeking greater government intervention – produce either no or negative returns. The reason is that their managers, unlike Bill Gates, face no genuine market test of their effectiveness.

Moreover, too much charitable giving is done for show – to impress the chattering classes with one’s devotion to the arts or with one’s compassion for the latest cause célèbre. The ostensible beneficiaries of such giving (“the poor,” “the red-cockaded woodpecker,” etc.) are seldom the direct objects of the alms-giver’s intentions.

In contrast, all business decisions are made to impress consumers – the people who actually stand to benefit from such decisions. When a successful entrepreneur takes monies from his business and gives it to charities, that person removes monies from a proven source of increased well-being and puts it into ventures that typically face no market test.

None of this denies that there are plenty of worthy causes deserving generous financial support. But each giver should choose wisely, avoiding giving to a cause just because it’s the movement-of-the-moment. And entrepreneurs certainly ought never feel obligated to “give some thing back.” Successful entrepreneurs have already created great wealth and opportunity for others.

If Bill Gates and other capitalists want to aid charities by reducing their own present consumption, that’s grand. But I for one hope that entrepreneurs take to heart Gates’s sage observation on charitable donations: “giving away money effectively is almost as hard as earning it the first place.”


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