Patrick Byrne is an entrepreneur—a self-described “rapacious capitalist.” His father, John J. Byrne, turned around auto-insurance giant GEICO. While he did, Warren Buffett began accumulating its stock, eventually purchasing the entire company. In the process, Mr. Buffett met 13-year-old Patrick, and he became what Mr. Byrne describes as “one of his life’s great teachers.” While a teenager, Mr. Byrne started his first business. He bought a wholesale lot of 500 pine trees—paying $8 each—and retailed them at Christmastime for $28 apiece.
Mr. Byrne went on to Dartmouth College, where he earned his B.A. in philosophy and Asian studies. He won a Marshall Scholarship and received a master’s degree from Cambridge University. After picking up a certificate from Beijing Normal University, he returned to the States and earned a Ph.D. in philosophy from Stanford University. While in his 20s, he also pursued his dream of becoming a heavyweight boxer.
Everything was put on hold when cancer struck. Mr. Byrne fought back, beating the disease three times. Afterward, he re-focused his energies on business, eventually serving as chairman, president, and CEO at Centricut, a manufacturer of industrial torch consumables, and later at Fechheimer Brothers, a Berkshire Hathaway–owned manufacturer of police, firefighter, and military uniforms.
In 1999, Mr. Byrne bought a small, bankrupt firm that had been serving the flea-market industry. Four months later, he relaunched it as Overstock.com, an online retailer specializing in the discount liquidation of overstocked inventory. Under his leadership as chairman and CEO, the company’s annual revenues have soared, from $1.8 million a decade ago to approximately $900 million today. Mr. Byrne’s success in business has allowed him to support causes that create similar opportunities for others.
Mr. Byrne works to reform American education through his service as chairman of the Friedman Foundation for Educational Choice. Founded by the late Nobel Prize–winning economist Milton Friedman and his wife, Rose, the Friedman Foundation is the nation’s original advocate of school choice.
Mr. Byrne also works extensively in the field of international development. In 2001, he launched Worldstock, a store within Overstock that sells handcrafted products from artisans in the developing world. An average of 60 percent of the sales price is passed back to the suppliers, generating more than $40 million to date for more than 10,000 craftsmen in the developing world.
Since 2005, Mr. Byrne has built 22 private schools throughout Africa, India, Asia, and Latin America, all of which are structured around a profit-making enterprise to sustain their ongoing operations. Each of the schools is named for his mother, Dorothy Byrne. They have educated more than 7,000 students worldwide.
Philanthropy spoke with Mr. Byrne about his background in developing countries, his work on behalf of school choice, and his use of for-profit entities to achieve charitable ends.
PHILANTHROPY: Your philanthropic work occurs in three basic areas: education, public policy, and international development. How did this portfolio come into being?
MR. BYRNE: Well, about 20 or 25 years ago, I was spending a lot of time in what was then called the third world. I studied developmental economics under Partha Dasgupta, one of the great theorists in the field. I gradually realized that much of the theory of developmental economics—especially its highly mathematical abstractions—was really misguided. To make matters worse, those theories were channeling the aid that the West was pouring into the developing world.
By the late 1980s, I began to see that economic development really comes down to two things. First is your educational system, particularly its treatment of women. Second is your legal system, especially its rule of law surrounding your capital markets. If you have a good educational system and you have good, honest capital markets, then before you know it, economic development just happens. So in my mind, the two great pillars of progress are education and capital markets. That basic insight is central to my philanthropy.
As far as the developing world is concerned, my efforts are very consistent with the philosophy I developed two decades ago. But I didn’t realize that 20 years later, the developing country I would be most concerned about would be my own. Here in the United States, we’ve got to improve our educational system and we’ve got to fix our capital markets. I believe that the educational system cannot be fixed while it remains a monopoly. And I believe that our capital markets are extremely skewed and even corrupt. So I’m working on those two issues: education and capital markets.
PHILANTHROPY: If you don’t mind my asking, I’m curious to know approximately how much you’ve donated to charitable causes in the last couple of years.
MR. BYRNE: I really respect the practice of tithing, but I’m also a capitalist. I try to create wealth. It’s not really about personal consumption—I’ve lived pretty frugally most of my life, at least until recently—but rather about creating wealth and trying to double it, and double it, and double it again.
I always try to weigh opportunity costs. Whenever I give money to charity, I think to myself, “Well, I could give $1 today, or I could hold on to it and double and double and double it. Then in three years, I’ll have $8 to give away.” Of course, a consistent 100 percent return on investment is really ambitious, but I think a good capitalist can be expected to make at least a 10 percent return on capital.
Now, giving 10 percent of an expected 10 percent return is the same as giving 1 percent. I put all that together and developed the rough rule of thumb that I give away 1 percent of my net worth every year. I settled on that approach about 15 years ago, when it became clear to me that I should be thinking about such things. In practice, however, I’ve given away much more than that. In my life, I’ve probably given away about $25 million, plus or minus $5 million. I’ve never counted it up, but that’s probably right.
PHILANTHROPY: Do you have a private foundation? Or do you arrange your giving through other philanthropic vehicles?
MR. BYRNE: Well, I think the legal entity matters less than the overall vision. I’ve been talking to Warren Buffett about philanthropy since I was 13 years old. One of the points he has repeatedly made is that, too often, people tend to be dilettantes with their charitable giving, sprinkling their money across too many things. What you should do with your money is find something where your resources can make a real difference. Don’t spread yourself thin by investing in too many different things. Try to pick one thing, or a couple of things, where you think you can have a really profound effect. That’s the theory that structures my giving.
Now, do I have a private foundation? I do, although it’s basically just a legal entity at this point. I usually give directly out of my bank account, not through the foundation. In most cases, I’m giving to a registered public charity, although there are a small number of people to whom I give personally, foregoing the tax exemption. But, most of the time, the people and groups I contribute to have their own 501(c)(3)s.
PHILANTHROPY: How does your experience as a successful entrepreneur inform your work as a philanthropist?
MR. BYRNE: I have certainly learned that scaling efficiently is difficult. Overstock grew from revenues of $2 million to $800 million in five years. Believe me, that is a difficult thing to do. It’s made me even leerier of big nonprofits. When I meet charities that are very targeted—folks who are thinking, “Let’s get soccer balls to every kid in this county in Nicaragua”—I’m usually impressed. They seem to be the right people. But when I run into the representatives of various global NGOs, I generally have a negative reaction. They don’t seem like the right people. They seem ego-driven. They seem wasteful, unconcerned with the payback on a dollar.
Now, these are generalizations, but I’d say the correlation is actually pretty high. There are NGOs that just look to me like big, fat, top-heavy, inefficient scams. If they faced market accountability, they would be eaten alive. On the other hand, you have people who are at the grassroots, Maryknoll nuns, people who aren’t driving around in $70,000 Range Rovers. They are digging wells, teaching villagers how to dig wells, and buying equipment for a bunch of villages to maintain their wells. Those kinds of groups look cost-effective to me. As a capitalist, I recognize a sort of kindred spirit there.
PHILANTHROPY: Let’s turn to your work on education reform. You’re the chairman of the Friedman Foundation for Educational Choice, one of the nation’s leading proponents of school choice. What does successful education reform look like to you? Is it structural reform, or is it student achievement? Let’s put it this way: if America’s public schools were to turn themselves around tomorrow, if our students were instantly to become the best in the world, would you still see a need for school choice?
MR. BYRNE: It would be certainly a less pressing matter if all that were true. But it’s like asking me how I would I have felt about Soviet central planning if the Soviets had started producing Volgas that were better built and less expensive than Audis. Sure, if they had done that, I would have to reassess what I thought of Soviet central planning methods. In fact, I’d have to re-think much of my worldview.
That said, I think lousy cars were a natural outcome of the Soviet central-planning model. The cars they produced were going to be low in value—in fact, they were awful cars—since they served an entirely captive market. There was no real consumer choice, so there was no incentive to create cars that people actually wanted. And guess what? Nobody who had a choice would ever buy a Volga.
I think we’re now in a similar situation with our public schools. And what really gets to me is how it harms our most vulnerable kids. I think low-income families in this country are getting absolutely cheated. I think their children are getting virtual death sentences. Without a good education, their life prospects are terribly diminished. Our current educational system does extraordinary harm to low-income kids.
But, to return to your question, yes, if America’s government-run schools were to turn themselves around suddenly, it would cause me to re-think my commitment to school choice—actually, a lot of my commitments, just as it would if the Soviets had suddenly started to produce Volgas that outperformed and were less expensive than Audis. But don’t hold your breath, because it isn’t going to happen. No monopoly I can think of has ever reformed itself without facing competitive pressures.
PHILANTHROPY: What are your thoughts on the current state of the school choice movement?
MR. BYRNE: Well, it faces a hostile opposition. It’s not just from the teachers’ unions, but the whole education infrastructure: the district, state, and federal bureaucracies, the schools of education, everything. I call the whole collective the “Guild.” The Guild treats school choice of any kind like it’s a tumor, like it’s cancerous. The goal for the Guild is to isolate, irradiate, and bombard it with chemotherapy. They want to destroy it.
But the problem for the Guild is that there is a slew of school choice programs that have been tested and have been successful. They’re relatively small, but where they exist, they are consistently found to be more successful than any other reform we’ve tried. There is a professor at Stanford, Carolyn Hoxby, who has made this her field. Her research demonstrates that educational choice programs consistently improve student performance.
I think the data is pretty conclusive on this point. If you track student performance in choice programs versus those in regular public schools, it turns out there’s a significant effect. There are 10 good studies that I’m aware of. Of those 10 studies, 8 find that voucher kids perform better than their non-voucher peers to a 95 percent statistical significance. (The other two studies show to a 92 percent statistical significance.) These are random assignment studies—the gold standard of social research—that neutralize the effect of having motivated parents. Speaking of parents, more than 80 percent of parents with children in the Washington, D.C., voucher program are satisfied with their school choice program. That’s an amazing number. Try to find 80 percent satisfaction with anything. It’s almost impossible.
PHILANTHROPY: Which school-choice strategy do you prefer: vouchers or tax credits?
MR. BYRNE: I like the simplicity of the voucher, as did Milton and Rose [Friedman]. Other people believe it’s easier to pass tax credits. Once a tax-credit system is in place, however, it takes more infrastructure to run it. That’s why, for myself, I’m attracted to the simplicity of the voucher program—it’s just easier to give somebody a voucher. But the truth is that a tax-credit program is equally effective and, from an economic point of view, is basically the same thing, particularly if they are refundable tax credits. So to me, it’s six of one or half-a-dozen of the other.
As far as I’m concerned, the most important thing is the breadth of the program. The Guild would like these programs to be tiny. Small programs are easier to isolate and destroy. That’s why the most successful programs are broad, usually statewide, because you can get 10,000 or more kids benefitting from school choice. In Arizona, for example, there’s a tax credit now worth over $50 million, with more than 27,000 participating students. It keeps growing. A state legislator may oppose school choice in principle, but she’s got 200 families in her district whose kids are benefitting from the tax credit. And she knows she doesn’t want to make enemies of those 200 families.
PHILANTHROPY: You’ve described charter schools as an element within the broader school choice movement. Other funders, however, say they’ve found better return on investment in the charter sector. Do you think that charters force enough competition that like-minded education reformers can focus on them to the exclusion of vouchers and tax credits?
MR. BYRNE: Well, I certainly think that charter schools are directionally correct. The key point is that we need to split government funding from government management. That was one of Milton Friedman’s many brilliant insights: government is good at funding services, but poor at managing them. With state funding of services, but not management of them, we can build whatever social safety nets we want, while still leaving people with choice and reducing the “road-to-serfdom” risk.
Another step—a baby step—in that direction is happening in Oakland. They have instituted what they call Backpack Funding, where kids go to the government-run school they want and the dollars follow after them. It’s a form of choice, even though the range of choices is limited among the current set of government-provided educational offerings.
Charter schools are a step in the right direction. Not only do students get a choice of schools, but they also get to attend a school that’s somewhat outside of government management. Again, it’s a step in the right direction.
PHILANTHROPY: How do you think homeschooling fits into the school choice movement? In a sense, these parents are decisively exercising educational choice. Is there a way for the choice movement to work with that constituency?
MR. BYRNE: I love homeschooling. All the homeschoolers I’ve ever met have been intensely focused on their children. But I have real misgivings about the intersection of homeschooling and the voucher movement. It’s not out of the question that if you were to make homeschooling part of a voucher program, you could create perverse incentives and attract people who would try to cheat the system. “Well,” you can imagine some people saying, “I’ll have five kids and collect $6,000 per kid and live off that.” Where vouchers and homeschooling meet, there’s the potential problem of the non-dedicated parent. However, this is perhaps one advantage that tax credits have over vouchers: you could only get a tax credit to the limit of the documented expenses you incurred educating your child, which would take care of the problem of the non-dedicated parent.
PHILANTHROPY: What advice would you give to donors new to education reform?
MR. BYRNE: My advice to new donors would be pretty simple: support the Friedman Foundation. I know it sounds like it’s just my job to promote it, but that’s backwards. I chose to get involved with the Friedman Foundation because I decided it offered the biggest bang for the buck on the most important issue facing our nation.
I knew Milton and Rose Friedman. They created this organization and worked to ensure its high ethical and intellectual standards. But I guess if new donors don’t want to support the Friedman Foundation, they should fund a specific state movement that’s trying to get universal vouchers or tax credits.
One thing I recommend against is trying to be too clever. I’ve run into other rich guys whose theory is, “We’re going to fund a bunch of private scholarships. The kids will do better, it will prime the pump, and the government won’t be able to turn a blind eye to the success. They’ll have to adopt universal vouchers.” I think that’s politically myopic. Now, if somebody’s giving money to a private scholarship program because they really want to help a specific group of kids, more power to them. But if their motivation is to crack the door open and create political support for vouchers, I think they’re being a little naïve. If you want school choice, you have to support the school choice movement. Helping one kid choose to defect from the system is good and laudable, but helping to change the system so that a million kids can defect would be better.
PHILANTHROPY: Has your work funding school choice efforts in the United States given you any perspective on your funding of private education overseas?
MR. BYRNE: Yes. I used to support a school for orphans and kids with physical disabilities in India. It had about 600 kids from the slums of Calcutta—as poor as you can get. All of the instruction was in English, and the students were performing at an amazingly high level. Well, soon enough, some middle-class families began to see that these poor kids from the slums were speaking better English than their children. Before you knew it, middle-class and even wealthy families were trying to get their kids into this school that was originally set up for the poorest of the poor.
Now, in India you need a special license to run a school that teaches in English. And what started happening? The government schools in Calcutta began putting pressure on the state bureaucrat who issues that license. They wanted him to revoke the license of the school I was funding because the parents in the government schools were starting to ask, “Why aren’t our kids getting as good an education?” Of course, the response of the government schools wasn’t to say, “How do we improve our schools?” It was, “Let’s take away their license.”
I eventually withdrew my support for this particular school after its founder passed away—I didn’t want to work with the people who replaced him. But the whole episode was a perfect illustration of what happens when the state has power over the education system.
PHILANTHROPY: What have you found to be the biggest differences between funding education in the States and funding education overseas?
MR. BYRNE: Well, they’re very different. For one thing, the schools we’re building overseas operate under an entirely different model from private schools in the U.S. When I start these schools, I work with Nate York, the founder of Solace International. He’s an entrepreneurial genius. He gets that I don’t want to build a school and then have to pay the ongoing operating expenses. So the idea is that I pay to build them—usually between $50,000 and $60,000 per school—and once they’re built, nobody has to put in another dollar to keep them going.
Each of these schools is built with a business model. So, for example, in a Nepalese village, you might build a school with six classrooms enclosed within a wall. Outside that wall, you have one classroom with its own opening to the street. That’s the computer classroom. At night, however, it doubles as the village’s Internet café. Even in remote Nepal, there’s always someone willing to pay 10¢ per hour to get online and send email to his cousin in San Francisco. That revenue stream in turn provides the funding which keeps the school afloat.
Now, we work in the developing world, where there are a lot of people with their hands out. Nate only builds schools where he can find a trustworthy administrator and group of teachers. He has to believe that the school can be turned over to these people and be successfully run after we withdraw.
Using this model, we’ve built 22 schools across Afghanistan, Nepal, Indonesia, and throughout Africa. Since 2005, we’ve educated more than 7,000 boys and girls in these schools. Today, we’re set to build our first school in Guatemala, and we want to franchise the model across Latin America.
Some of these schools are for girls only. Many of the schools are for orphans. But they all rely on a business component to sustain the school’s operations. One school raises broiler chickens. Another school sells fish from its fish pond. Another school has a woodworking shop, where students apprentice as woodworkers and sell their products at Worldstock.
PHILANTHROPY: Could you say a few words about Worldstock?
MR. BYRNE: Sure. Worldstock is a store within Overstock. It’s dedicated to selling crafts produced in the developing world—especially crafts by disadvantaged artisans like women and people with disabilities—and selling them at minimum mark-up so as to maximize payments to the artisans.
It’s actually an extension of Overstock’s business model. Overstock is in many ways a reaction against the retail revolution of the last few decades. In that time, the supply chain of the American retail system has become optimized for mass quantities of similar goods from a small number of suppliers. Overstock’s business model is to optimize itself around the opposite of those three trends. We sell small quantities, not mass quantities. We sell dissimilar goods. And we draw on a very fragmented supplier base—hence “overstock,” excess inventory—the dribs and drabs. We liquidate the excess—the 50 televisions sets and the extra 20 chairs and the extra 73 Cuisinart blenders—that, for whatever reason, had been spit out of the supply chain of the conventional retail system.
Well, those three things turn out to be the characteristics that describe artisanal production. Almost by definition, artisanal work is created in small lots, not mass quantities. Those small lots are of highly variable products. And they come from a very fragmented supplier base. Overstock is a perfect distribution system for these products.
I was just in Colombia, where I visited a group of 20 artisans who make furniture for Worldstock. A lot of those people are able to work from their villages, and some even work from home. It gives people an opportunity to enter the global market, but to do so without leaving their homes, moving to the city, and getting a job on a sewing machine or in a sweatshop. In that sense, it’s much less dislocative than expecting everybody to participate in mass production.
PHILANTHROPY: You’ve written that Worldstock deliberately operates on razor-thin margin pricing. Given that profit maximization doesn’t seem critical to Worldstock’s definition of success, did you ever consider structuring it as a low-profit, limited-liability corporation (L3C)—or even as a nonprofit entity?
MR. BYRNE: Yes, we discussed a range of ideas like that about five years ago. We considered it very seriously, but came to the conclusion that it created more problems and paperwork than it was worth. Worldstock is so tightly integrated into our whole company that it didn’t seem worth it to develop its own logistical, inventory-management, and marketing systems. If I had created it as a nonprofit, it would have been something of a legal fiction—an entity that only exists on a bookshelf in the accounting office—and I just didn’t see the benefit of it. The truth is it didn’t seem worthwhile.
PHILANTHROPY: What would you say to critics who say that while Worldstock undeniably helps individual artisans, it doesn’t do enough to alleviate the crippling systemic problems—like the lack of rule of law, enforceable contracts, and reliable capi-tal networks—facing the developing world? How would you reply to somebody who says, “This is palliative, but ultimately not trans-
MR. BYRNE: God save the developing world from the great transformative vision of Western theorists. We have six decades of Western aid to study, and I really do think it’s done more harm than good. We reinforced autocratic regimes, we reinforced bureaucracy, and we reinforced corruption. We created systems where the most talented, educated people in these countries ended up in working in the aid-seeking industry. Yes, you want rule of law, yes, you want education. Other than that, Western aid workers can keep their grand visions—their Lord Jim fantasies—to themselves.
Besides, I think our efforts actually have a quiet, transformative dimension. Take a family in Afghanistan. Through Worldstock, it triples its income—but it’s tripled through the woman, not the man. That has something of a subversive effect. Now, to your point about systemic problems, Afghanistan eventually got too difficult for us because of the corruption. I didn’t want to deal with it any more. But the same thing is going on right now, on a hillside in Peru, where a woman is making alpaca sweaters and tripling her family’s income. Even if you don’t consider that transformative, it’s making a real difference for her, just like it’s making a difference for 10,000 other people and their dependents.
PHILANTHROPY: My last question looks toward the future. You’ve survived three battles with cancer, so I assume you’ve given this some thought to this issue. What are the long-term plans for your charitable giving? Is your foundation intended to be perpetual? If so, have you thought about ways to safeguard your intent?
MR. BYRNE: First, I remember a friend of Buffett (I think it was [Charlie] Munger) saying, “Anyone who dies rich is a fool.” In a perfect world, with my last breath I’ll be giving my last dollar away. However, on the off chance that I don’t manage to time that one perfectly, I have set up a foundation. It’s a legal entity. I haven’t done much with it yet. When I go, however, everything will go in the foundation. It will not be a perpetual entity. It’ll be tasked with giving away the money as fast as it can, because I think the worst thing that can happen is to wind up creating a foundation with 500 people in a skyscraper running around writing each other reports. I certainly didn’t work this hard in order to create something like that. I doubt very much that any settlor would have wanted that. But it happens. It’s almost a crime against humanity. There’s all kinds of good that money could be doing.