The Economics Of Philanthropy

The essence of philanthropy in the society is not a matter of debate at face value. There is widespread social and political support to the practice, often deemed as one of the solutions to recalcitrant social and economic problems. Philanthropists all over the world have contributed towards the research and development of cures, vaccines and mitigates to various diseases while also providing social amenities such as schools, water and hospitals. This has led to the consideration of philanthropy as the ideal economic model in anti-capitalist thought, denigrating the role of for profit enterprises in the society (Boettke & Coyne, 2008). Just because philanthropy operates in a gift exchange model where there is no agreement on future or immediate rewards make it appear nobler and socially useful than market exchange. The latter refers to situations where exchanges are made for value received. The presence of value depicts capitalist ownership and leads to the attack on market exchange in the aspect of promoting societal economic and social good. However, in reality, market exchange has important contributions to the economy, which when considered, makes philanthropy appear negative in consideration of its political economy and the economic theory fronted by Mises (2004) and Hayek (1945). This paper presents the difference between market exchange and philanthropy and why it makes government welfare problematic in light of the above economists.

There are two key differences between market exchange and philanthropy. Philanthropy does not generate economic data due to its uneven distribution in the market and also lies outside economic calculation based on the arguments of Hayek (1945) and Mises (2004). First, in the knowledge problem argument, Hayek (1945) highlights that economic data in any rational society is not given to any particular individual but is rather distributed  across individuals in the market in an incomplete and contradictory manner. Hayek (1945) emphasizes on the specific knowledge of time and place, arguing that what people know about their resources, markets, businesses and so forth is important in their planning. Therefore, market exchange is the source of economic data that is imperative to any economy now that knowledge is distributed unevenly. On the other hand, philanthropy does not generate such knowledge due to non-involvement in market activities. In the same way, Mises (2004) proposed that market exchange allows us to understand consumer needs through calculation of profits, losses and prices. Without them, lots of economic possibilities would be unknown. This presents the second difference between the two facets, in that philanthropy exists outside economic calculation that can precipitate economic knowledge and possibilities.

The differences between market exchange and philanthropy present challenges in government welfare. As Hayek pointed out in the knowledge problem, no one had unilateral access to all the economic data in a society. It was therefore insensible for any philanthropist, including government, to attempt to address social needs through philanthropy, as they assumed that they had perfect market knowledge. Therefore, it is probable that the problems addressed by philanthropy were non-existent in the first place or were not reliably addressed. Another problem that emerges is consistent with the argument that economic data was generated from market processes, which meant that philanthropy was a hindrance to its generation. This means that government welfare, as good as it may appear, does not advantage the greater economy as no data can be generated. The process of obtaining economic data on aspects such as unemployment and inflation requires the interaction of buyers and sellers rather than unilateral acts of philanthropy. Additionally, according to Mises (2004), it is impossible to understand market possibilities through philanthropy and thus government welfare. This is because there are no market calculations of profit, loss and many other economic considerations (Boettke & Coyne, 2008). The problems facing the economy and how they could have been addressed is difficult to delineate in such settings and can make decision making for a government and businesses difficult in the end. More importantly, Mises (2004) pointed out that in the absence of profit motive, an enterprise is driven by inflexible rules (bureaucracy). This means that philanthropic actions such as government welfare are not sustainable and may not be able to respond the market realities or unforeseen events. It is for this reason that government welfare activities have led to increasing public debt and coercion of the common man through taxation in order to finance them.

Therefore, it is apparent that philanthropy, unlike the popular thought that it offers economic solutions, is actually problematic for economic stability. It differs from market exchange in that it does not generate economic data which is often unevenly distributed amongst different players in the market in an uneven manner. The non-involvement in market activities renders an economy unaware of its key challenges and advantages as a result. Additionally, philanthropy leads to lack of knowledge on economic possibilities due to operating outside the market calculation of profits, loss, prices and other important market characteristics. These differences pose several problems on government welfare. Now that Hayek points out that economic data is unevenly distributed, welfare assumes the government’s possession of perfect market knowledge, which is misleading and in essence may lead to addressing of non-existent needs. Additionally, failure to understand market possibilities and generate economic data works against the progress of private businesses as well as the macro economy. It was also notable that the absence of profit motive leads to bureaucracy as pointed out by Mises, which means that welfare acts inflexibly and is not sustainable. It thereby results to burgeoning debt and burdening of the local man with taxation.

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