In our time of rising socialistic rhetoric and indignation against those who have great levels of wealth, we also encounter the idea that the use of wealth for charitable purposes is better for society, perhaps even more moral, than the use of wealth for business development and capital investment.
Few interpretations of social affairs are as unpopular as defenses of the existence of billionaires and wealthy capitalists. But it is the employment of capital into the production structure that reaps great benefit to the world. To elaborate on this theme, I want to summarize a certain concept that was formulated by the great F.A. Harper in the 1956 festschrift to Ludwig von Mises.
In his essay “The Greatest Economic Charity,” Harper challenges the prevailing notions regarding the relationship between wealth redistribution and charity. We can, as Harper does, refer to economic charity in a standard dictionary sense wherein the purpose of charity is to initiate material benevolence, to improve the material well-being of someone else, most often someone who has a particularly obvious set of needs to be met.
But in terms of material benevolence, we can reasonably see a difference between an effort of charity which improves the immediate conditions of a man, and an effort of charity which improves the long-term conditions of not only a specific person, but an entire society of them. It is this latter charity, which actually works to prevent men from facing constant need of charity in the future, that Harper refers to as the greatest economic charity. He writes, “The greatest charity of all… would be to assist a person toward becoming wholly self-reliant within nature’s limits, and therefore totally free.”
Here, we can turn our focus to Harper’s separation between what we might call consumptive charity and productive charity. By consumptive charity, I refer to what most naturally comes to mind when we think of the nature of charity. Harper describes this concept as follows:
“Of the various forms of economic charity in which we commonly indulge, the simplest would seem to be something such as buying a vagrant a cup of coffee or giving him a dime for the purpose.” (In the 1950s a cup of coffee was 10-cents).
Most of the colossal amount of activity which today goes by the name of charity is of this type, where the intent of the giver is to provide something for direct consumption or relief of a destitute recipient. Unfortunately, too many people focus their understanding of charity on those acts which only has the effect of consumption-based needs-resolution in the immediate term.
While there is a role for this type of charity in society, it can also be counter-productive, can actually subsidize current conditions, and can even be leveraged by politicians and other power-seekers to effectually enslave men. For example, writes Harper in 1956,
“National socialism is a common form, where the state becomes the dispenser of loot collected by force. The recipients lose their self-reliance in the process and come to feel indebted forever to the collective for their very lives. They have by then become enslaved.”
In our time, the ever-popular democratic socialism could just as easily be used as the example. Thus, we turn to productive charity; or charity that comes about as a result of “savings invested in privately owned economic tools of production.” Harper argues the investment into the “tools of production” not only has a longer and more sustainable effect on the livelihood of people, but it actually meets the conditions of charity in a much more profound way.
By economic tools of production, Harper means capital goods; goods, as Murray Rothbard, explains, “which aid in the process of production eventually to produce consumers’ goods.“ They are the factories, the equipment, the manufactured machinery that are arranged together to increase the output of goods that individuals consider as serviceable to satisfy their ultimate material ends.
Now, Harper describes three ways in which capital investment in the immediate terms satisfies the characteristics of economic charity in the longer term. First, the investment in capital goods today eventually produces new goods that otherwise would not have been created; the tools make possible extra goods which are, by definition, passed on to others who see value in them.
Second, the transfer of economic benefits is voluntary—for stolen property passed from one party to the other does not meet the conditions for true charity; charity precludes theft as a means of wealth transfer. Charity requires the benefactor to act freely and of his own will in passing on material benefits to another.
Third, and perhaps most insightfully, Harper mentions the clear anonymous nature of this economic charity. Rather than charity done with trumpets and lavishing media attention, investment into the capital structure has a benefit for thousands, perhaps millions of future people, many of whom are not born yet and certainly are unaware of the identification of this benefactor. Appealing to self-reflection, Harper writes:
“One can easily test from his own experience the anonymity of the charity that flows from savings and investment in tools. If one will list all the economic items he consumes or enjoys in a day, the test is to try in each instance to name specifically all the persons whose savings and investment made the item possible. Most of us, I dare say, could not name even one person responsible for an item we use and enjoy.”
The material well-being that was passed on to present day hundreds of millions of beneficiaries of the yesterday’s investment, Harper observed at the time, was vastly greater than the funds collected on an annual basis for consumptive charity. In fact, consumptive charity was “less than 1 percent of the amount of charity which users of tools receive” in the same length of time. This is because the capital tools bolster the quantity and quality of goods and therefore make workers more productive; it extends and expands the fruit of their labor.
The reason that the west faced greater levels of wealth than other parts of the globe over the last 300 years has little to do with things like disparities in intelligence, a spirit of innovation, and hard work. How much harder to so many people around the world work merely to survive another day? What really matters is the accumulation of savings and the investment of that savings into capital goods. At any time, mankind has within its reach the ability to pass on a greater amount of wealth to people it has never met; it does not require brilliant planners, democratically based political angst, or a soaking of the rich.
Harper therefore encourages his reader to have a wider perspective on the ramifications of the contemporary spirit of emphasizing consumptive charity over productive charity. It’s possible, he states, that the giving of the grain to a starving person… could better serve as seed for a harvest that would keep twenty persons from starving later. […]
Savings, when used wisely by private enterprise to produce capital tools of venture, serve as economic seed in a like manner. The use of it as seed becomes an act of charity with a high leverage. But its creation requires enough patience and restraint from demands for immediate consumption so that the tools will be created. One must have foresight and economic insight enough to see beyond the exceedingly conspicuous and tempting need for present consumption.
Capitalism provides a better and longer-lasting charitable effect than any other socio-economic arrangement conceivable. The savers and investors of today, those who contribute to the buildup of capital goods and factors of production, are benefactors of persons yet unborn. If economic charity is at its greatest when it enables men to overcome the conditions of poverty and hand-to-mouth existences, the social criticism of capitalists and those that invest into the capital structure must be swiftly brought to an end.
“Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest. Compound interest is standard in capitalist finance and economics. Compound interest has been called the eighth wonder of the world and the greatest invention in human history.” (Gospelbbq)
Investment vs Consumption
“The problem with any Communistic or Socialistic economy is that of capital consumption — they consume capital rather than create capital. Eventually the capital runs out. Those who oppose capitalism claim it is a materialistic scheme which promotes consumerism. But, it is they who are the true consumptionists; who consume capital rather than create it.” (Rousas John Rushdoony)
C. Jay Engel is a business owner and entrepreneur who lives with his wife and two children in northern California. He is especially interested in wealth accumulation and preservation in our era of rogue Central Banking. He is an avid reader of the Austro-libertarian literature and a dedicated proponent of private property and sound money. He is the creator and editor of AustroLibertarian.com.