The So-Called Charitable-Industrial Complex

Warren Buffett’s son Peter is a decent musician and a fine fellow. He has written a useful book about the personal challenges of being born into a wealthy family, and how to escape unrealistic life expectations to find fulfillment. If only his op-ed in the New York Times on July 27th had been so well thought-out and useful.

Mr Buffett was thrust into the world of mega-philanthropy in 2006, when his father promised, among other big donations, around $1 billion to the Novo Foundation that the musician runs with his wife, Jennifer. His op-ed makes it clear that he has been dismayed by much of what he has encountered in the philanthropic/non-profit world. He has found “Philanthropic Colonialism”, “conscience laundering” and a “crisis of imagination”, and has come to hate the word “charitable” because there are no solutions to be had through charity, as it “can only kick the can down the road”. The trouble is, Mr Buffett flings just enough mud to provoke outrage or despair whilst providing just too little specific detail for anyone to know what exactly he thinks should be done differently.

First, there is the misleading title, which to be fair may have been the work of a sub-editor rather than Mr Buffett himself. The term ‘charitable-industrial complex’ deliberately evokes the ‘military-industrial complex’ described by former American President Dwight Eisenhower in his farewell speech in 1961. Noting that the “conjunction of an immense military establishment and a large arms industry is new in the American experience”, Eisenhower warned that “we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex.”

On our reading of Mr Buffett’s op-ed, he does think that the charitable sector is a large new industry, but he certainly does not think it has acquired unwarranted influence. He is not suggesting that we should be alarmed because Bill Gates has become Barack Obama’s puppet master. Instead, he seems to be arguing two things: that successful capitalists are using small scale, ineffective charity as a figleaf to hide the damaging ways in which they create wealth; and that the activity of succeeding in capitalism inevitably undermines the efforts of capitalists-turned-philanthropists to solve problems.

“Inside any important philanthropy meeting, you witness heads of state meeting with investment managers and corporate leaders. All are searching for answers with their right hand to problems that others in the room have created with their left,” Mr Buffett argues, before equating the desire to “give back” with “conscience laundering”, which means “feeling better about accumulating more than any one person could possibly need to live on by sprinkling a little around as an act of charity. But this just keeps the existing structure of inequality in place. The rich sleep better at night – that’s a fact – while others get just enough to keep the pot from boiling over.”

There are several different claims compressed together here, some valid others not. As we have argued many times, capitalism certainly needs to be reformed. Yet whilst it is certainly true that some of the problems philanthropists are trying to solve were caused by the business activities of other philanthropists, that is by no means always the case – or, we would argue, the norm. Take Mr Buffett’s own father for example, one of those investment managers: what have any of his investments done to create the sort of problems philanthropists are trying to solve? (Okay – maybe his investing in CocaCola has contributed to the obesity epidemic.) Likewise, his partner in doing good, Bill Gates: it is hard to see how anything he has done, or indeed what any other philanthropist today has done, has contributed to, say, all those children dying from malaria that he is trying to save.

Likewise, inequality is arguably a big problem – though poverty is a bigger one. Yet one way to reduce inequality/poverty is to ensure that everyone has a decent education. It is clear from our research that philanthropists have been focused for decades – even centuries – on improving the education system, especially for poorer people. It has been others (such as, in recent years in America, some teachers unions) who have blocked their efforts, and who arguably are more deserving of Mr Buffett’s criticism.

Yet Mr Buffett seems to go further, apparently arguing that philanthropy itself contributes to harm (“Nearly every time someone feels better by doing good, on the other side of the world (or street), someone else is further locked into a system that will not allow the true flourishing of his or her nature or the opportunity to live a joyful and fulfilled life.”). Not a single piece of evidence is offered in support of this claim.

Mr Buffett also dislikes how “business principles are trumpeted as an important element to add to the philanthropic sector” through phrases such as “return on investment” (ROI). Yet two paragraphs later he argues (in our view, rightly) that “foundation dollars should be the best ‘risk capital’ out there”. Mr Buffett seems unaware that the phrase “risk capital” is drawn from business, and that perhaps the best way to assess if philanthropic capital is being used as risk capital is to measure and analyse its return on investment (in the sense of social/environmental return – which is how we think Mr Buffett is using the phrase – rather than narrow financial return alone).

Mr Buffett clearly wants change, though it is anyone’s guess what change he had in mind when penning these phrases: “I’m really not calling for an end to capitalism; I’m calling for humanism”; “Money should be spent trying out concepts that shatter current structures and systems that have turned much of the world into one vast market”; “It’s time for a new operating system. Not a 2.0 or a 3.0, but something built from the ground up. New code”; and “It’s an old story. We need a new one.”

For what it is worth, we think that there is a new story unfolding, one that has been under way for a few years. It is led, in some ways, by Mr Buffett’s father and his pal, Bill Gates. It stresses the importance of philanthropic money being used as risk capital, and of achieving systemic change. We call it “Philanthrocapitalism“.

It would have been interesting to have heard from Mr Buffett junior about how he thinks philanthrocapitalism is doing, and what specifically could be done to improve its effectiveness. Alas, instead we got a no doubt heartfelt but depressing and ultimately useless rant.