Putting Philanthropy in Order
The writers of many economics textbooks state the discipline’s subject matter as the study of what is produced for whom, and how. Curiously enough, they rarely complete the usual list of “wh-” questions to include when and why. This is symptomatic of the neglect by mainstream economics of time and people’s motivations. The neglect of time—and of demography, which until about 1911 was an integral part of every course in economics—has left economists, governments, and private citizens insufficiently prepared for dealing with the consequences of the aging of industrial societies. Ought the government to provide for our needs after we have stopped working for our income? In that case we have to decide how to redistribute the earnings and wealth that have been generated by the market, through taxation and transfer payments by the government. Or should the provision for old age be left up to private initiative? The latter is usually interpreted as meaning that every individual takes care of their own pension. But the sphere of private initiative does not stop here. Individuals may also decide to voluntarily transfer their wealth to others without expecting anything in exchange. This is the sphere of altruism and philanthropy, which also suffers from a lack of attention by economists.
It is therefore welcome that Laurent Dobuzinskis raises the question of how to integrate altruism into economics (2009). He discusses the role of civil society and its relationship to the market economy and develops the argument that a philanthropic order essential to the welfare of individuals and to the growth and stability of what Hayek calls the "Great Society" evolves parallel to the market process. For his discussion of altruism he builds upon the work of Marcel Mauss, student and son-in-law of the great French sociologist Emile Durkheim. His analysis of the market order follows the ideas of Friedrich Hayek. All this puts him squarely in the tradition of Adam Smith’s research program, as I will now try to explain.
Smith’s Research Program
Smith’s most famous book, the Wealth of Nations, looks into the causes of economic growth. It investigates the role and functioning of both the market and government. This is one part of Smith’s research program. The other, complementary part, published previously in The Theory of Moral Sentiments, analyzes civil society. This is the domain between the spheres of influence of government and of the market. In contemporary literature it is often referred to as social capital. The fact that Smith put the market and government together with this intermediate domain on his research agenda makes him a pioneer. One of his followers on this path is Durkheim. In his first book, De la division du travail social, Durkheim turns the analysis of civil society, and what distinguishes it from the subject matter of economics, into the foundation of sociology. This is argued in Birner and Ege (1999), where we contrast Durkheim’s work with that of Hayek, and in this comment I build upon what we have said there.
What Is the Question?
Dobuzinkis states without further argument that the market order and the philanthropic order are complementary. I prefer to reformulate this as the question of the extent to which gift-giving and market transactions influence each other either positively or negatively. An extreme way of putting this is to ask, Is it better to have a market society in which all transfer payments are defined by law in terms of rights and obligations, or one in which they are gifts that depend exclusively on the benevolence of individuals?
These cases are ideal types in which there is no room for civil society. In reality we have seen that in communist regimes civil society emerged out of the private initiatives that aimed at remedying the defects of the centrally planned economy. These initiatives often showed market-like features. In market economies, on the other hand, the role of government is more limited. But the market fails to provide for everything the government does not. There remains a set of goods and services desired by citizens that are not produced by either government or the market. This leaves room for private initiative and spontaneous social organizations for providing collective goods, club goods, and goods that are transferred directly between individuals. Philanthropy belongs to this sphere. What it does is to redistribute wealth according to the preferences of the donors without there being any rights or obligations (other than those stipulated in the private agreement between parties) on the part of the receivers.
Defenders of distributive justice would like to see the sphere of transfers by the government extended. While not necessarily opposed to private donations, they favor the creation of rights to transfer payments for those who do not have the means to provide for some set of goods and services that are considered to be “basic.” At the same time they want to impose the obligation to pay for these transfers on those who are sufficiently well-off. Such an extensive scheme of rights-based transfers leaves less to be distributed by philanthropy. Apart from objecting that such a system implies an intrusion on individual freedom, market liberals such as Hayek and Friedman argue that making redistribution part of a “bill of rights” risks undermining the incentives that make a market system function. My assessment is that there is likely to exist an optimum mix between the two extremes. The questions of how that mix is composed and whether it can be optimized according to some criterion must ultimately be answered by empirical research. Here I will raise some preliminary theoretical issues.
The Market and Philanthropy: Solutions to Different Problems?
Markets are the solution to the problem of coordination; gift giving, according to Mauss, is an instrument that reinforces cooperation and solidarity. Society, in order to be stable through time (or reproduce itself), needs both the coordination of the actions of individuals and their cooperation—as Smith understood well. Hence Dobuzinskis’ idea that the market and philanthropic orders are complementary is a hypothesis with a respectable intellectual pedigree. Durkheim and Hayek represent two contrary traditions within Smith’s research program. Hayek tries to explain cooperation as arising out of market relationships. Durkheim does the reverse. Hayek believes that cooperation works only in small groups whose members share common objectives. As soon as the groups grow and the skills and preferences of their members differentiate, cooperation is not enough, and the market is needed to coordinate individual actions. It is precisely this idea that Durkheim rejects. He puts in its stead the priority of social cohesion over market exchange and the pursuit of self-interest, observing that without cohesion, competition (which is basic to the functioning of the market) becomes a centrifugal force that threatens social stability. Mauss argues that gift-giving creates solidarity. So, combining Durkheim’s and Mauss’s ideas, philanthropy would be part of the necessary conditions for maintaining the framework in which the market can function. Mauss’s work on gift-giving raises general issues that can be used to clarify the relationships between allocation through the market and through voluntary transfers.
The differences between Hayek’s and Mauss’s approaches are clearly illustrated by their ideas on the emergence and function of credit. For Mauss, financial credit as we know it has evolved out of a system of giving, accepting, and reciprocating gifts that serve as a provision for the future for individuals. Gift-giving, while creating cohesion, is not deprived of elements of self-interest. For Hayek, on the contrary, credit is the result of the spontaneous emergence of partial-reserve banking in a market economy. Not only did it make it possible for individuals to permanently live beyond their means, it practically forced them to do so, producing ever more in order to be able to pay their debts, thus making credit one of the causes of economic growth.
For Mauss, credit and social security are closely related. A system of old-age pensions is an integral part of the cycle of giving, receiving, and reciprocating. In Hayek’s and Friedman’s thought, on the other hand, social security should remain limited to a “safety net” that keeps individuals from starving if they remain without an income. Their proposal is added to their market liberalism in an ad hoc manner. Hayek gives no arguments why individuals who through no fault of their own remain without an income should receive transfers to keep them from being destitute. Friedman’s negative income tax proposal equally lacks a solid theoretical foundation. Hayek’s proposal might be underpinned by an appeal to a Rawlsian, veil-of-ignorance, implicit-contract model of society (which may be why Hayek, who is averse to social-contract theorizing, did not elaborate the issue in this direction). The link with game theory might be pursued: the market is part of an institutional framework that keeps a repeated positive tit-for-tat spiral of interaction going. Therefore, it is in everybody’s interest that individuals should not be discouraged from participating in the market process by the prospect of losing everything. A further step in this direction would be the idea that guaranteeing individuals a minimum income may keep them from undertaking actions that threaten the existence of the market economy. But whatever argument one chooses, the theoretical work remains to be done.
Transfer Payments, Entitlements, and the Law
As to pensions, Hayek and Friedman presumably leave provisions for old age up to private initiative or consider them as being covered by the social safety net or negative income tax. Hayek’s crusade against “social justice” may have kept him from elaborating on these issues. At any rate, he did not deal with them in Law, Legislation, and Liberty (1973-1979), which is about the legal framework of the market order. Now, as Durkheim had recognized—and he even made it a cornerstone of his theorizing—laws are the sedimentation of social norms. They fix, and make explicit, rules of behavior that may or may not have emerged spontaneously into a codification that starts to lead a life of its own. In Karl Popper’s words, laws become part of World 3 (cp. for instance, Popper, 1967). One consequence of this is that they become susceptible to criticism, and hence amelioration, an aspect that Popper emphasizes in The Open Society and Its Enemies (1945). Hayek, on the contrary, warns against consciously meddling with laws which are the endogenous result of a spontaneous process of social evolution. He holds up the English system of jurisprudence, the accumulated wisdom of the responses of individual judges to concrete cases, as an example to be followed. But here he runs into conceptual difficulties, because he has to draw a line between human actions and decisions that give rise to certain social norms spontaneously and those having the express purpose of influencing norms. We may object that purposely introduced interventions may have beneficial effects (a successful vaccination campaign, for example), and whether these effects are intentional is a secondary matter. Unintended consequences, on the other hand, may be disastrous. (AIDS is a dramatic example.) There is no reason why we should accept all and any unintended effects of individual actions as positive and condemn any consequences of individual actions and decisions that turn out to be exactly as intended because of the fact that their realization coincides with their planned objectives.
Let’s apply this to redistribution. For Hayek, redistribution is acceptable to the extent that it is an unintended effect of changes in individuals’ participation in market exchange. Where does that leave the redistribution that is the consequence of the express philanthropic wishes of an individual? Must philanthropy be forbidden because it has intended redistributive effects? That would conflict with individuals’ liberty to dispose of their possessions as they like. Or must philanthropy be allowed or even encouraged insofar as it has beneficial unintended effects that enhance the working of the market? In order to be consistent, Hayek would have to accept the latter while rejecting the former. In reality, however, matters may be more complex that this. Philanthropy has intended collective redistributive effects; if it didn’t, nobody would engage in it. At the same time, if we accept Mauss’s idea and combine it with that of Durkheim, philanthropy reinforces the social cohesion that is necessary for the functioning of the market. Clearly, we have to move beyond Hayek’s framework.
Philanthropy: Rights, Power, and Discrimination
Even if we accept that a right to receive transfer payments from private fellow-citizens does not exist, we may still question whether it is acceptable that an unequal distribution of gifts is entirely dependent on the whims of a Bill Gates or a Warren Buffett. (As a matter of fact, they have limited their personal influence by conferring their gift-destined wealth to foundations. But foundations need statutes, so what do we write into the statutes?) A related matter has to do with the power that comes with wealth. If certain basic provisions of citizens become dependent on private donations, as was the case with clientelism in ancient Rome, givers acquire more power than can be justified, in a democratic society, by leaving everything up to private initiative. The freedom to give what you want to whom you want is equivalent to the power to exclude non-beneficiaries. This raises the issue of discrimination. I can imagine that a U.S. charity that finances projects for the reduction of poverty of young white males is more likely to be the object of critical scrutiny than one that destines its resources to the promotion of the careers of poor black females. Philanthropy cannot clash head-on with social norms. On the other hand, whereas the state cannot afford even to create the impression that it discriminates, individuals have more room for maneuver. In my example, a successful white businessman with a poorBronx background who founds a charity to promote the education of poor white boys from theBronx is less likely to be accused of discrimination than a government agency that does the same.
An important reason why societies continue to exist is that they are institutions in which individuals may benefit from the activities of others without being capable of turning society to their own exclusive advantage—and accept that this is the case: “We’re all in it together.” A stable society is characterized by a complex texture of rights and obligations that is in some sort of dynamic equilibrium. Let’s look for a moment at philanthropy in this light, but now from the point of view of the individual. A rather common justification for philanthropy is the wish of individuals to give back something to the society that has allowed them to accumulate their wealth. This is facilitated by the fact that the realization of this desire may come at a low cost. Normal human needs can be satisfied with a small part of a great fortune. If money has a diminishing marginal value, what is left has relatively little economic value to its owner. (I leave aside the matter of its symbolic value, which in a Maussian perspective would deserve to be examined further.) His sacrifice is reduced even more if society puts a premium on philanthropy in the form of tax deductibility. Even if we accept that value is not intersubjectively comparable, this makes it reasonable that part of an individual’s wealth is put at the disposal of others. Whether or not this should be done through taxation and transfer payments by the government or directly by individuals is in part a question of expediency and not only a matter of principle.
So where does this leave Dobuzinskis’ idea of the spontaneous co-evolution of philanthropy and the market? We may say that from society’s point of view philanthropy is desirable or even necessary for two reasons. One is that, as Mauss argued, it creates a system of mutual commitments that are an important ingredient of the cement of society (Smith’s civil society). A link between giving and social cohesion that Mauss did not pursue is the psychological finding that giving creates a dependency effect on the giver rather than the receiver. Economists might translate this into their jargon by saying that philanthropy augments the utility of the giver, but more typically they will see the relationship between giver and receiver in terms of a decrease in the utility of the former and an increase in the utility of the latter. This contrasts with the result of psychological research just mentioned and reinforces Mauss’s case over the rather poor motivational framework of traditional economics. Fortunately, experimental economics is making rapid progress here.
The second argument is that philanthropy helps fill the gaps between the fields of influence of the market and of government that inevitably remain in a complex society. Pace Popper’s argument referred to above, analyzing both the imposed and the spontaneous rules of the philanthropic order and codifying them into laws helps us define the relationships between these three spheres and improve their relative contributions to the well-being of citizens and to social stability. The analysis of the legal framework of philanthropy deserves a theoretical effort comparable to what Hayek did for the market order in Law, Legislation, and Liberty. Trying to improve on Mauss’s rather naive ideas about the role of government in philanthropy and concentrating on the relationships between philanthropy and the market, as Dobuzinskis does, are important contributions to Adam Smith’s research program.
Birner, Jack and Ragıp Ege. 1999. “Two Views on Social Stability: An Unsettled Question.” American Journal of Economics and Sociology. Vol. 58: 749-80.
Dobuzinskis, Laurent. 2009. “French Perspectives on the Origin and Logic of the ‘Philanthropic Order’: A Critical Account.” Conversations on Philanthropy VI: 115-139. ©2009 DonorsTrust.
Hayek, Friedrich A. 1973-79. Law, Legislation and Liberty. 3 vols. Chicago: University of Chicago Press.
Mauss, Marcel. [1924-1925] 2007. Essai sur le don. Forme et raison de l’échange dans les sociétés archaïques. Paris: Quadrige/PUF.
Popper, Karl. R. 1945. The Open Society and Its Enemies. London: Routledge & Kegan Paul.
______. 1967. “Epistemology Without a Knowing Subject.” Objective Knowledge: An Evolutionary Approach. Oxford: Clarendon.