Philanthropists give what the state demands

The popularity of the Polish Great Orchestra of Christmas Charity is encouraging a return to the arguments of Nobel Prize winner Milton Friedman. He claimed that state support for underprivileged people is unnecessary, since private donors would give such help of their own accord.
Philanthropists give what the state demands

“The capitalist system, the private enterprise system in the 19th century did a far better job of expressing that sense of compassion than the government welfare programs are today,” said Milton Friedman, “the 19th century is the one most people denigrate as the high tide of capitalism was the period of the greatest outpouring of eleemosynary and charitable activity that the world has ever known. One of things I hold against the welfare system most seriously is that it has destroyed private charitable arrangements, which are far more effective, far more compassionate, far more person to person in helping people, who are really through no fault of their own are in disadvantaged situations.”

We do not have the possibility of checking what would happen if the state suddenly stopped helping the needy. This is something after all, that the governments of each civilized country do. But we can look at the situation of the underprivileged in the times before the welfare state.

Friedman died in 2006, but two years earlier professor Peter H. Lindert from the University of California published a book called “Growing Public: Social Spending and the Economic Growth Since the Eighteenth Century.” There he wrote that up to the 18th century hardly any money from taxes reached the poor.

Only at the end of the 18th century were the first transfers of any noteworthy value introduced (these were called “poor relief”). These were still tiny sums in comparison to current social transfers for underprivileged social groups (for example, in 2013 the social transfers of OECD states reached an average 21.9 per cent of GDP).

In the 19th century only in England and the Netherlands (the richest countries in the world at the time) did social transfers exceed one per cent of GNP (for example in 1850 in England and Wales transfers were 1.07 per cent of the GNP and in The Netherlands 1.38 per cent). In France in 1833 social transfers were only 0.63 per cent of GNP, in Belgium in 1850 they were 1.03 percent and in the USA 0.13 per cent of GNP. In other states there was no social welfare at all.

A lot of organization, little help

Did private charitable organizations enter the space left behind by the state? This was indeed the case in England and Wales, where tens of thousands of such organizations existed. The so-called Charity Commission monitored their activities. Not all the money these organizations collected reached the poorest in society. Some spent their money on education while some had religious aims. Altogether, according to data from 1819-1839, these organizations collected donations annually amounting to GBP 1.2 million, or 0.4 per cent of GDP.

When their budgets were again counted in 1861-1876, the charities were receiving GBP 2.2 million annually, which was by then only 0.24 per cent of GDP. Only GBP 0.9 million was given to the most needy, around 0.1 per cent of GNP.

In Holland in 1790 total spending (both private and public) on helping the poor reached between 1.46 and 1.93 percent of GNP. Private and church assistance was estimated to contribute between 0.67 and 1.49 per cent of GNP, which until the 20th century was the highest level of private support for the poor in the world. For comparison support from the French church in 1790 only reached 0.17 per cent of GNP, and in 1880 private donors and the church together gave no more than 0.5 per cent of GNP (a similar situation existed in Italy).

Peter H. Lindert also uses another example to show that not only does state welfare not deter private philanthropy, but that the two are usually correlated (so the more the state gives, the more private donors are likely to give). For example in the USA in 1927 the support provided by the state amounted to 0.17 per cent of GNP, while private charity was 0.16 percent. By 1995, state welfare had risen to 3.85 per cent of GNP and private grants grew only to 0.26 percent.

Help not without reason

The relatively high (though laughable in comparison with current state spending on welfare) spending on the underprivileged was not only the result of good will. In protestant states such as the Netherlands and England the richest were legally obliged to give donations in support of the poorest in society.

Furthermore, in England before 1832 power was concentrated in the hands of the landed gentry. In order to have a vote a citizen had to own land and pay taxes on it. According to estimations every seventh citizen of England and Wales (and every tenth citizen of Great Britain) fulfilled this criteria. Why did landowners vote for the generous system of supporting the poor through taxes that existed before 1834?

The industrial revolution led to a great number of hired farm workers leaving the countryside and moving to cities in the hope of raising their standard of living. They had a strong incentive, as particularly in autumn and winter there was little work on the farms and they had nothing to support themselves. For this reason landowners voted for increasing the social welfare that came from taxes, which meant dispersing the cost of supporting their workers onto people who did not directly benefit for their labor (everyone paid taxes, not only those with a vote).

It is noteworthy that even this low (according to today’s standards) level of welfare caused much controversy. The famous English economist (and cleric) Thomas Malthus in his “Essay on Population” from 1798 argued that poor families who were given help would have more children and as a result their financial situation would continue to deteriorate. In 1834 the British parliament decided to withdraw even this low level the support for the poor.

In the USA, which is the global leader in private charity, approximately 7 per cent of GNP is donated (data from 1995). In other countries the share is between 0.6 and 3.7 percent. It should be remembered however that a lot of these funds are not donated to support the poor: in the USA donations are given in support of higher education or medical research for example. Many indications suggest that a large part of private funding for charity is a result of imperfections in corporate management structures.

In a September 2013 publication “Do managers do good with others people’s money” Ing-Haw Cheng of Dartmouth College, Harrison Kong of Princeton University and Kelly Shue from the University of Chicago Booth School of Business decided to explore why certain companies give so generously to charity. The authors quoted Milton Friedman, who in 1970 said that companies have no obligations other than earning money.

Certain companies emphasized that charity was a form of investment that brings returns in the form of positive opinions, meaning customers are more inclined to buy their products. The researchers were determined to find the real motivation behind the charitable activities of companies by looking at tax cuts from dividends (in the U.S. in 2003 this reduction was from 35 percent to 15 percent). In effect, it became more profitable for managers to take shares than profits.

Following a tax cut on dividends the amount that companies were willing to give to charity indeed dropped, however the most noticeable fall was at companies where the managers held a moderate amount of shares (companies where the managers had a large stake spent less money on charity anyway). This analysis does not prove that charitable giving does not bring a company some measurable gains, but the authors note that managers give more to charity than would seem beneficial from a business perspective because they “want to do good with money that isn’t theirs.”

In conclusion, without state coercion there is no efficient support for the needy, and private initiatives such as the “Great Orchestra of Christmas Charity” can only supplement state support.

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