Philanthropy is the solution to the Piketty conundrum of r > g. Philanthropy does two things: it reconstitutes wealth and it creates opportunity for others by investing in education, universities and research that increase growth.
Capital in the 21st Century has become a runaway best seller. While the book has raised eyebrows across the academic and business community, it has not been put into the proper perspective. Piketty’s book makes one principal claim, that r (the rate of return on assets) grows faster than g (the overall rate of economic growth). Because wages almost never grow faster than the economy, income inequality is always on the rise.
In a pluralistic liberal democracy, like most of the Western World, rising income inequality is a real issue, as inequality has the potential to undermine democracy. With greater wealth concentrated at the top, the wealthy increasingly find ways to “buy” elections on the one hand and to maintain economic and political power on the other: money to get power and power to keep money.
But what is really at issue here is not that wealth and income are concentrated, but that the concentration of wealth undermines capitalism itself as rent seeking (diverting productive capital towards unproductive activities that manipulate the political system for personal gain) flourishes and entrepreneurial activity and innovation lags. Piketty’s answer to the dilemma of having r > g is a global wealth tax. However, this answer is widely seen as inadequate. The underlying problem remains: how do we overcome the wealth gap?
Philanthropy is the solution to the Piketty conundrum of r > g. Philanthropy does two things: it reconstitutes wealth and it creates opportunity for others by investing in education, universities and research that increase growth. So philanthropy simultaneously accomplished two goals. First, it increases g by creating opportunity for entrepreneurs and workers by raising productivity and therefore the growth rate of the economy. Second, while it does not reduce r it reduces the size of capital in private hands therefore narrowing the gap in income and wealth distribution.
Why Philanthropy Matters: How the wealthy give and what it means for our economic well-being provides an in-depth analysis of this 19th century solution to the Piketty puzzle. It is in part a uniquely American answer. America has faced the question of what to do with wealth and debated it for 300 years. America wanted rich people but it did not want a class structure. In other words, America wanted to become rich but did not want wealth to remain in the same hands. So America invented philanthropy.
Philanthropy has long been a distinctive feature of American culture, but its crucial role in the economic well-being of the nation—and the world—has remained largely unexplored. Why Philanthropy matters takes an in-depth look at philanthropy as an underappreciated force in capitalism, measures its critical influence on the free-market system, and demonstrates how American philanthropy could serve as a model for the productive reinvestment of wealth in other countries. Factoring in philanthropic cycles that help balance the economy offers a richer picture of capitalism, and a more accurate backdrop for considering policies that would promote the capitalist system for the good of all.
Philanthropists strengthen American-style capitalism in two ways. The first is that philanthropy, when targeted to universities, research and other productive uses, lays the ground work for new cycles of innovation and enterprise. The second way philanthropy strengthens capitalism is that philanthropy—like creative destruction—provides a mechanism for dismantling the accumulated wealth tied to the past and reinvesting it to strengthen the entrepreneurial potential of the future. The philanthropist’s recycling process is a partial answer to the question of what to do with wealth, which must be reinvested in creating social stability and opportunity for all.
This uniquely American solution to the age old issue of wealth also gets around the question of redistribution that makes many uneasy. While America championed the issue of wealth the idea has roots in England and Europe. But this idea has been lost in Europe with the rise of socialist thought. Just look at the comments concerning Piketty’s work.
Oxford University is uniquely positioned to become a major, if not the major voice integrating these two ideas—Capital in the 21st Century and Why Philanthropy Matters—because these two ideas create a way forward. Oxford with several other institutes already engaged in very large questions facing the 21st century provides a unique forum drawing on its history and wealth of knowledge about the many facets of this issue.