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The Myths of Philanthropy. Morals not Markets Make us Give

Is philanthropy driven by morality or markets?

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By Eric Michael Johnson

A flawed understanding of early human culture has resulted in a distorted understanding of how philanthropy evolved and what motivates philanthropic activity in the modern world. All evidence suggests that philanthropy is fundamentally driven by morality not markets. Systems of philanthropic debt obligation connect people—as well as organizations and even companies—in reciprocal networks of collaborative enterprise. They build mutual trust while enhancing the reputations of those who provide aid. In short, philanthropy and market capitalism have separate histories, motivations, and goals. Blurring the line between philanthropy and for-profit investment risks confusing social value with shareholder returns, to the detriment of both.

In classical economics, the origins of philanthropy are commonly associated with the invention of money. In The Wealth of Nations, Adam Smith described a fictitious hunter-gatherer who learns to make bows and arrows that are of a higher quality than those of his fellow tribesmen. “He frequently exchanges them for cattle or for venison with his companions; and he finds at last that he can in this manner get more cattle and venison, than if he himself went to the field to catch them,” Smith wrote. Rational self-interest led the hunter to focus on making the best bows and arrows so he could trade them for food and other material needs. Smith believed that wealth emerged as a result of such calculations multiplied across entire societies.

Smith also argued that money evolved from this original barter system, and that philanthropy was a natural outgrowth of a money-based economy. Instead of depending on individual barter transactions to satisfy human needs, it became more convenient to adopt standard currencies that could be exchanged for any product in the market. Precious metals were favored as currency because they were rare, malleable, and therefore easily identifiable. In this new market economy, some traders had more innate talent and thus performed better than others. As a result, they accumulated more wealth. Eventually, rich barons and clerics started spending their financial surpluses “in the most profuse hospitality, and in the most extensive charity.”

Philanthropy came first

The notion that philanthropy resulted from the invention of money is a pillar of classical economics. It is also a myth. After more than two centuries of searching for an indigenous society that approximates Adam Smith’s parable of the original barter system, anthropologists have concluded that it can only be imaginary. “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing,” wrote Cambridge anthropologist Caroline Humphrey in a 1985 paper titled “Barter and Economic Disintegration” in the journal Man. Instead, researchers have discovered that philanthropy is far more central to human social organization than economists had ever imagined.

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The notion that philanthropy resulted from the invention of money is a pillar of classical economics. It is also a myth.

In the modern world, philanthropy has become an economy unto itself, comprising a vast network of individuals, charitable foundations, for-profit corporations, and nongovernmental organizations dedicated to every imaginable cause. According to the Hudson Institute’s 2012 Index of Global Philanthropy and Remittances, member nations of the Organisation for Economic Co-operation and Development (OECD) contributed $128 billion in aid to developing countries last year. At the same time, business enterprises in OECD countries contributed $56 billion in philanthropy to the developing world, in addition to $329 billion from foreign direct investment.

This blurring of traditional giving with for-profit enterprise has led to increasing calls for a paradigm shift in philanthropy. In 2011, then-World Bank president Robert Zoellick invoked a system in which “assistance would be integrated with—and connected to—global growth strategies, fundamentally driven by private investment and entrepreneurship.” More recently, Harvard Business School professor Michael Porter has called for a “shared value” approach to philanthropy in which private companies would help others by helping themselves. Yet if the anthropological record is any guide, such arguments reflect a flawed understanding of how philanthropy and markets really work.

Why Bushmen aren’t capitalists

You might think that the social habits of hunter-gatherers living in the Amazon or sub-Saharan Africa have little relevance to philanthropy in a world dominated by market capitalism. You’d be wrong. Hunter-gatherer societies represent a global laboratory of human behavioral diversity. But when there are broad commonalities across these isolated cultures it suggests an adaptive strategy rooted deep in our human past.

Rather than a simplified form of market economics, as Adam Smith assumed, hunter-gatherer economies are typically structured around giving practices that can best be described as a system of philanthropic debt obligations. A common feature in most of these communities—ranging from the !Kung Bushmen of the Kalahari desert to the Oroqen reindeer peoples of Inner Mongolia—is that both food and material possessions are freely given to those who need them based on an informal system of social responsibility. In many tribal societies, for example, praising another person’s necklace or pig creates a moral duty to present the item as a gift, according to the University of London anthropologist David Graeber, author of the 2011 book Debt: The First 5,000 Years.

What is crucial for these gift economies, however, is that there is no expectation of direct reciprocity, a finding that challenges the core assumptions of classical economics. “As with so many actual small communities,” Graeber writes, “everyone simply keeps track of who owes what to whom.” There is no marketplace, no precise accounting, and, except under rare circumstances, no tallying of the relative value of a given item, or what its fair recompense would be. All members of the society usually owe something to someone else, a social network of gratitude that fosters their overall spirit of altruism.

Based on the archaeological evidence of residence patterns, this way of life was likely the norm for our Pleistocene ancestors dating back hundreds of thousands of years. However, systems of philanthropic debt obligation were also common throughout the ancient world and in Medieval Europe. This suggests that Adam Smith wasn’t so much chronicling the evolution of modern market economies as he was observing what existed during his time and then projecting it onto the human past.

In today’s business world it has become increasingly popular to argue that companies should incorporate social and environmental value creation into their core business models. The anthropological record suggests a very different conclusion. While companies should undoubtedly seek to be good corporate citizens, philanthropy is best seen as an end in itself and not as a way to boost the bottom line.

25 October 2015


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  • Swami Cat

    I think you would be hard pressed to find any but the dimmest economist alive today who believes money preceded philanthropy.

    Yes, nomadic foragers have a system which can best be described as built in great part upon social capital, including nested webs of philanthropy, indirect reciprocity prestige, and assistance.

    Smith’s comment taken at face value implies market generated wealth is used for philanthropy not that markets are necessary for philanthropy. Logic check. The effective use of markets to generate wealth above subsistence is indeed dependent upon markets, and even a casual look at history reveals the vast majority of pre market post foraging economies lived at a Malthusian limit of horrible poverty.

    The point which the author seems to lose in this article is that markets are an alternative (albeit a complementary one) to philanthropy. A market system is one based upon reciprocal exchange, which scales well into hundreds, thousands and billions (unlike forager systems which require smaller numbers, egalitarian rule ethos (see Boehm), and exit options/freedom.) Otherwise the system gets infested with free riders and alpha exploiters.

    It may very well be true that the dominant mechanism of social coordination was indirect social reciprocity and social capital. However as communities get bigger and more complex and limited in exit options (agriculture), this model breaks down. Barter can help mitigate this somewhat, but a system of exchange based upon money is infinitely more efficient than barter.

    There is absolutely no evidence that social capital models of philanthropy scale well, nor that it is the role of a corporation to become philanthropic with investors’ money. The basic model is investors invest money for productive purposes, enriching the lives of consumers in exchange for enriching their own lives. Investors, who own the company can and do donate their money to philanthropic causes.

    Expecting the firm to do both the profitable investment and the philanthropy is inefficient and unstable. Now investors have to decide on two parameters — how to invest and how do donate. The likelihood that the intersection point of the two is ideal within one firm is extremely low, thus inefficient, thus less likely to foster total wellbeing of humans using such a system.