Buffett and sour grapes

We recently came across this brief interview from a “political philosopher.” Of course, that’s not going to mix well with our nothing-but-the-fundamentals view of business and achieving goals. (We tend to leave the philosophy for the goal-setting.)

In brief, the gentleman says that Warren Buffett’s generous gift to charity, rivaling the US’s most revered benefactors, is broken for a couple reasons: first, we should have more foundations rather than fewer; second, the Gates Foundation will be a monopoly, which isn’t good for it or for philanthropy; third, Buffett has no right to use his money for private charity unless he does better than the public, i.e., government sector.

Here are some of the other points that concern us about the article:
1. The statement that “All wealth is derived from the commonwealth” gets us in a tizzy. It brings to mind a quote from one of our well-read lawyers: “I think we fought a war over that once.” The reference should be to the Declaration of Independence: “–That to secure these Rights, Governments are instituted among Men, deriving their just Powers from the Consent of the Governed.” Governments exist because we choose to give them money and power and to reasonably submit to their will. The state is the charity, not the free market.

  1. The fellow also seems to misunderstand why the free market is generally considered to be a good thing by proponents. No one really cares about there being a multitude of market participants serving the marketplace. A fragmented market is no guarantee of quality. However, if firms can evolve because of competitive pressures, then multiple companies will (and ought to, in the prescriptive sense) go out of business as failures. All that’s required to make this work is competitive pressure; you don’t really need a plethora of firms in the market. Hint: that’s why the DOJ/FTC are concerned about “market power” and not concentration. If it’s easy to enter a market, competition does not have to be real to be felt and responded to. Well-run companies improve their products and services before competition can harm their businesses. Self-cannibalization is the smartest path; we recall a book title along the lines of “eat your own lunch before someone else does.”

  2. ” Bundling software and hardware, a kind of monopoly, was a bad thing for Gates’ Microsoft. That’s why the government sued.” We’re just confused by this, which makes us wonder why someone would write it. Our understanding is that it’s pretty clear that monopolies price higher in a way to maximize their benefit, to the detriment of society. This is the first time we’ve heard of the argument that it’s a bad thing for a monopoly to be a monopoly. It’s possible that this argument would make sense if you made a few assumptions, such as that the company had no other ideas about how to deploy capital and so research and development efforts languished. That begs the question of whether companies need to perpetuate their existence. Schumpeter would probably disagree that there’s any inherent benefit to companies qua companies continuing to exist. That’s a different question from dislocation effects that are experienced (or suffered, depending on where you stand) from creative destruction. The whole point of a monopoly might be to extract capital from society, redistribute it to stakeholders and investors and then let reinvestment take the “let a thousand flowers bloom” approach. If monopolies are efficient at turning revenue into profit, then that isn’t a ridiculous idea.

  3. The government sector’s efficacy notwithstanding, there is a long tradition in America of doing more than the government does. For example, some people might say that the federal government should not fund an activity, such as a church. So private persons elect to do that. The next step is to recognize that some people think the government should spend more money on an activity, such as environmental protection. So private persons elect to do that. We balance the income and expenditure issues at the federal, state, and local levels through the miracle of politics (the balancing of competing interests is the essence of politics), and then people operate against that backdrop.

Now for the efficacy question: we often read about factors that seem like they are related to charitable efficacy and efficiency, but they are really stories about things that are proxies at best for those things. For example, administrative expenses as a percentage of overall expenses is a common item used to rank/evaluate charities. Clearly, money spent on administration is not available for charitable activities. However, does anyone believe that operating without administrative expenses is likely to increase actual efficacy, the securing of positive results, however measured, from the charity’s activities?

The issue of separating efficacy from efficiency from proxies for those items is a question that has interested us for nearly two years now, and we are finally ready to do something about it. We are completing an article detailing the issues surrounding the problem as well as finalizing plans for the launch of a nonprofit organization to guide the creation, collection, collation, and synthesis of measures of charitable efficacy for various types of organizations. Notably, the Robin Hood Foundation undertook some of this type of investigation to support and tune its own grantmaking, but we believe a comprehensive approach would benefit society — recipients of charitable activity, donors, employees, officers, and directors of charitable organizations, and indeed, those organizations that do better than others. As a society, we should want to reward those organizations that are making a difference from those that are not.

Clearly, an apples-to-apples comparison is required; it makes little sense to compare Habitat for Humanity’s impact on homelessness to that of a legal aid foundation that represents the homeless from an advocacy group that drafts, comments on, and challenges legislation. While reasonable people may disagree and debate the wisdom of different allocations of funds among those various efforts, that debate is much more complicated and unlikely to be resolved by our project. What we hope to do is clarify whether “hovels for humanity” is more or less efficient at implementing the same anti-homelessness strategy as Habitat. We’ll soon create a separate post to draw the parallels between our current financial analysis approach to for-profit companies and this evolving approach for analyzing non-profits. We are currently investigating wiki platforms for the initial launch of the project so we can start moving while we finalize the plan.