A Response to "Why Sharing the Wealth Isn't Enough"

In his column today prompted by the Billionaire's Giving Pledge, Steven Pearlstein of the Washington Post kindly referred at length to an essay that Zoltan Acs and I published in The American Interest last Spring. Here's what Pearlstein had to say:

In an article last year in The American Interest, Philip Auerswald and Zoltan Acs of George Mason University suggested that the defining characteristic of American capitalism is not only an entrepreneurial culture that generates great wealth but also a philanthropic infrastructure that recycles that wealth in ways that create more opportunity, more growth and more wealth. This virtuous cycle, they concluded, is the "inner dynamic of American capitalism and the source of its prosperity." They contrast that to socialist countries, where philanthropy is weak and government takes on the recycling role, or less-developed countries, where oligarchs' fortunes are not recycled at all.

That's a pretty good summary. But Pearlstein isn't buying our case that philanthropic giving is a cornerstone of American capitalism:

Auerswald and Acs are known as institutionalists because of their focus on institutional arrangements and behavioral norms in explaining why economies work. Not surprisingly, their views have been embraced by business types and free-market conservatives who shamelessly use them to justify small government, low taxes and minimal regulation.

... Yes, philanthropy has been important, but so have unions, which ensured a fair distribution of corporate profits. So have antitrust laws that prevented successful companies from snuffing out entrepreneurial competition. So have norms of corporate behavior that made it socially unacceptable for top corporate executives to pay themselves 350 times what their workers made. And so have tax-supported schools, playgrounds and hospitals that were good enough to be used by rich and poor alike.

He goes on to point out that income inequality is increasing, the middle class is disappearing, and " it will take much more to revive the virtuous cycle by which wealth begets opportunity which in turn begets more wealth."

Considered in an historical context, I really don't disagree with much of what Pearlstein has to say. Indeed, I agree that "Sharing the Wealth Isn't Enough." Dewey the development of American public education? All for it. Unions, "the people who brought you the weekend"? Kudos.

But systems of public education are not distinctly American. Neither is organized labor. (Furthermore the same unions that once brought us the 40-hour work week have more recently shared culpability in bringing millions of U.S. manufacturing workers the less-desirable zero-hour workweek.)

What is distinctly American is a system of institutions--didn't really think of myself as an institutionalist, but I guess I am one--that allocates resources to successful entrepreneurial initiative, allows for the accumulation of wealth, and then--importantly--encourages the transfer of wealth back into the economy not only through consumption and investment (that was trickle down), but also through philanthropic giving. This is the process that brought us the National Gallery of Art, Harvard, Stanford, and now an expanding world of philanthrocapitalism that is funding some of the world's most promising entrepreneurial solutions to global challenges. But, of course, such a system does not arise out of nowhere. Political leadership and policy define the context and can be important drivers in advancing entrepreneurship and innovation. As Pearlstein himself has recently noted, even regulation and standard-setting--often incorrectly cast as an enemy of entrepreneurial initiative--can serve to drive innovation.

That's one thing. Another is that Pearlstein's lament about the hollowing-out of the American middle class--while accurate as stated--misses a bigger trend moving in the opposite direction. The fact is that, on a global scale and using measures that mean more than income, inequality has been shrinking dramatically. Skeptical? check out this 2007 talk by Hans Rosling (yes, I know I'm big into Hans Rosling right now):


The entirety of the experience of the United States over the last decade has been a sideshow to this larger global change, driven by increasing wealth in previously poor places (ref. e.g. Greenspan's "connundrum" and role of China's savings in our real-estate bubble).

Bottom line: Do I think that the U.S. at the moment could benefit from looking a tad bit more like Canada or (God forbid!) France? Along some dimensions, such as health care and standards for energy efficiency, I would say yes. But over the next quarter-century most of the world will benefit hugely from looking a lot more like the United States in at least this respect: building institutions to support entrepreneurs and celebrating philanthropists the put their wealth in the service of society.