Milton Friedman on Philanthropy

The Philanthropy Roundtable mourns the death of Milton Friedman at the age of 94. Friedman’s heart stopped on November 16, 2006. His ideas about the central importance of philanthropy in a free society live on.

Nobel Prize winner in economics, distinguished professor of economics at the University of Chicago, senior research fellow at the Hoover Institution, co-author of the magisterial Monetary History of the United States, author of the classic best-seller Capitalism and Freedom, long-time Newsweek columnist, and architect with his wife Rose of the extraordinary PBS television series Free to Choose, Milton Friedman was one of the greatest and most influential economists and philosophers of liberty in the 20th century. He was the visionary behind the school choice movement, and one of the most articulate advocates of numerous public policy reforms ranging from floating exchange rates to a volunteer army to allowing competition in postal service.

Friedman also made three important contributions to our understanding of charitable giving. First, he described the close relationship between charitable giving and political and economic freedom. Second, he articulated a devastating critique of the concept of “corporate social responsibility.” And third, in his advocacy of a negative income tax, he examined the limitations of charity in achieving universally or near-universally popular objectives.

“There are only two ways of co-ordinating the economic activities of millions,” wrote Friedman. “One is central direction involving the use of coercion—the technique of the army and of the modern totalitarian state. The other is voluntary co-operation of individuals—the technique of the market place.”

Philanthropy in its essence is voluntary, and Friedman saw charitable activity as the ally of voluntary exchange in the economy. He argued that market capitalism and philanthropy go together, and that it was no accident that 19th-century America, the great age of individualism and limited government, “was the period of the greatest private eleemosynary activity in the history of the United States”

“The period of unrestrained, rugged individualism was a period when the modern type of nonprofit community hospital was first established and developed. It was the period of the Carnegie Libraries and their spread through the philanthropy of Andrew Carnegie. It was the period when so many colleges were founded throughout the country. It was the period of the founding of the Society for Prevention of Cruelty to Animals, and the spread of foreign missions. There was no income tax, no deductibility of contributions, so what people spent on charity came out of their pocket and not, as now, largely out of taxes they would otherwise pay. And yet, in every aspect of private charitable activity, it was a boom period.”

But if Friedman rhapsodized about individual philanthropy, he was a sharp critic of much corporate giving, and in particular of giving based on the concept of “corporate social responsibility.” In a famous article in the New York Times Magazine, Friedman wrote that “the social responsibility of business is to increase its profits.” The corporate executive is an employee of the owners of the business, its stockholders, and Friedman held that management does not have the right to spend owners’ money for any purpose other than to advance the interests of the business.

Note that Friedman was not against all corporate giving. Corporate philanthropy could be justified if it served a business objective—for example, increasing customer loyalty, or improving employee teamwork and motivation, or strengthening the marketing of a company’s brand. Giving by privately held companies was also completely justified, because in this case the proprietors would be voluntarily spending their own money. But giving by a publicly held corporation in the name of “social responsibility” was a form of theft. It was also, in Friedman’s view, an open invitation for outsiders to determine for the corporation how it should be socially responsible. It “involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses.”

Friedman thought that on occasion political mechanisms were preferable to private charity. This was especially true in the case of “neighborhood effects”—free-rider problems that can limit the magnitude of charitable giving, because would-be donors assume the problem will be taken care of by others. Consider this passage, from Capitalism and Freedom, where Friedman made the case for the negative income tax:

“I am distressed by the sight of poverty; I am benefited by its alleviation; but I am benefited equally whether I or someone else pays for its alleviation; the benefits of other people’s charity therefore partly accrue to me. To put it differently, we might all of us be willing to contribute to the relief of poverty, provided everyone else did. We might not be willing to contribute the same amount without such assurance. In small communities, public pressure can suffice to realize the proviso even with private charity. In the large impersonal communities that are increasingly coming to dominate our society, it is much more difficult for it to do so.”

For defenders of freedom, this is a potentially problematic argument, for it could conceivably justify government funding of numerous forms of assistance that have historically been handled by private generosity, and this could lead to the danger of coercion—allocative decisions by government that many individuals wouldn’t make voluntarily. But in exceptional cases where there is universal, or near-universal, support for a spending objective (and hence little danger of coercion), Friedman suggests that allocating resources through the political process can be consistent with the principles of a free society and can be more effective than relying on voluntary charity.

These cases are exceptions. In general Friedman argued that government can never duplicate the variety, the diversity, the creativity, or the experimental vitality of individual action. He helped us to understand that philanthropy is a form of voluntary decision-making by individuals and by groups of individuals who have freely chosen to come together, and he thus illuminated the vital connections between a flourishing charitable sector and a vigorous free society.