Why entrepreneurs offer more to society when they create wealth than when they give it away

The Wall Street Journal yesterday published an editorial by Kimberly Dennis in which she made a point that isn’t stressed enough today. She said essentially that giving to charity is a worthwhile and noble endeavor for wealthy entrepreneurs, but those entrepreneurs actually make a more significant and positive impact on society through their businesses because they create products that improve people’s lives and provide jobs that allow people to earn their living. Ms. Dennis was talking specifically about Bill Gates’ and Warren Buffett’s Giving Pledge where 40 of America’s wealthiest entrepreneurs pledged to give away the majority of their wealth to charity:

Successful entrepreneurs-turned-philanthropists typically say they feel a responsibility to “give back” to society. But “giving back” implies they have taken something. What, exactly, have they taken? Yes, they have amassed great sums of wealth. But that wealth is the reward they have earned for investing their time and talent in creating products and services that others value. They haven’t taken from society, but rather enriched us in ways that were previously unimaginable.

Even if Mr. Gates makes progress in achieving his ambitious philanthropic objectives–eradicating disease, reducing global poverty, and improving educational quality–these accomplishments are unlikely to match what he achieved by giving us the amazing capability we literally have at our fingertips to access and spread information. The very doctors and scientists who may develop cures for diseases like malaria will rely on the tools Microsoft supplies to conduct their research. Had Mr. Gates decided to step down from his company and turn to philanthropy sooner than he did, they might have fewer such tools.

While businesses may do more for the public good than they’re given credit for, philanthropies may do less. Think about it for a moment: Can you point to a single charitable accomplishment that has been as transformative as, say, the cell phone or the birth-control pill? To the contrary, the literature on philanthropy is riddled with examples of failure, including examples where philanthropic efforts have actually left intended beneficiaries worse off. The Gates Foundation has itself acknowledged that one of its premier initiatives–a 10-year, $2 billion project to reorganize high schools around the country into schools with fewer than 400 students–was a complete bust. Good for them for admitting it. In that, they are unusual. In the failure, they are not.
It’s not that charities or philanthropic efforts don’t offer value to society; of course they do. But if you want to liberate the largest number of people possible from poverty or lift the standards of living for the largest number of people possible, businesses that operate in the free market will do that faster and far more efficiently than charities or a government program. Why? It’s simple, really. When Bill Gates, Warren Buffett, and the millions of other entrepreneurs around the nation started their businesses and worked to keep them as profitable as possible, they created jobs that provided paychecks for countless numbers of employees and their families, week in and week out for decades. And a job provides freedom and opportunities that charity simply cannot.

Keep in mind, those millions of employees didn’t just earn an income. They learned new skills and gained new competencies that they didn’t have before, which made them eligible for promotions that gave them even larger paychecks or new opportunities in other companies. As these employees earned more money, they sent their kids to college to learn skills and competencies that they, in turn, used to earn an income or open up a business of their own. If they ran their businesses well and earned a profit, they provided jobs that brought paychecks to other people and their families, too. And so goes the cycle of benefits of entrepreneurship in the free market.

The crux of the situation is this: charities can not do great work without entrepreneurship and the creation of wealth. How can someone donate to or start a charity without it?

Andrew Carnegie, for example, could not have built over 2,000 libraries if he had not received the benefit of employment at businesses owned and operated by other entrepreneurs. Carnegie was penniless when his family moved to the US from Scotland in the mid 1800’s. His first job was as a bobbin boy in a Pittsburgh cotton mill when he was 13 years old earning $1.20 a week. A few years later, he almost doubled his weekly income when he took a job as a messenger boy for the Ohio Telegraph office. He learned everything he could there, gained new skills, and almost doubled his weekly income again week when he took a job as a secretary/telegraph operator at the Pennsylvania Railroad. He advanced at the railroad until he eventually became superintendent of the Pittsburgh Division.  Wanting to move beyond just being an employee of a company, he invested money in a few businesses, including in a company that made sleeping cars for the railroad. His accumulation of capital over the years allowed him to buy his first steel mill. Carnegie’s greatest achievement may have been his demand for efficiencies and advancements, which allowed him to produce steel cheaper than any of his competitors. That cheaper steel built the skyscrapers, railroads, bridges, steam locomotives, and ships that powered the industrial revolution and raised the American people’s standard of living.

Henry Ford, like Andrew Carnegie, began his career modestly and worked his way up at various businesses, including Thomas Edison’s Illuminating Company. Interestingly enough, Ford probably used Carnegie steel to produce his Model Ts at the Ford Motor Company. And like Carnegie, it was Ford’s determination to make his automobile company successful that made him look for efficiencies in production. That led to his revolutionary creation: the assembly line. That one invention not only made the automobile far more affordable for many more people, it revolutionized the manufacturing process for all kinds of products. As more products were produced more economically, prices dropped. Vast swaths of people were able to purchase all kinds of convenience products which increased the quality of their lives. Naturally, the increased demand for these products led to more jobs, which led to higher wages and standards of living.

So, all this brings us back to Kimberly Dennis’ article and the question what does the greatest good, creating wealth or giving it away. While Bill Gates, Warren Buffett, and other successful business leaders are being very generous by pledging to give away most of their wealth, Ms. Dennis was right when she said they and others make a mistake by thinking that they will do more good for more people giving away their money than they did when they were earning it.

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