The Greatest Economic Charity

[On Freedom and Free Enterprise (1956)]

When asked to contribute an essay to Professor Mises’s Festschrift, I was at first inclined to dip my pen in the well of humility and then lay it aside unused. On what economic theme has Professor Mises himself failed to write with a superiority to anything I could offer? Yet honor is due him. So I trust that friends of this great and patient teacher will tolerate an essay’s imperfections for the sake of the spirit of an offering.

Professor Mises’s main renown is as an economist. Yet to me he is a charitable person even more than an economist. His charity is not of the fashionable kind that ladles out economic pleasantries from a caldron filled with socialist loot obtained by theft. His is not even primarily of the material sort at all but is, instead, in the form of his inspiring mind and spirit. In my opinion there can be no greater charity than this, for it endures beyond any material form of benevolence.

In this essay I shall be dealing, however, with one aspect of economic charity — a form inferior to charity of the mind and the spirit. People spend vast sums trying to do good with economic alms in forms which, to me, seem open to serious question. In their haste to do good and to bask in the glow of immediate glory as purveyors of alms, they are being exceedingly wasteful of the means of benevolence. The methods they use would come to appear unbenevolent, I believe, if they would view them by the test of alternatives in the longer perspective of economic science. That is the thought I should like to explore here, in honor of Professor Mises.

A certain Talmudical philosopher once offered us this apothegm:

The noblest charity is to prevent a man from accepting charity, and the best alms are to show and enable a man to dispense with alms.1

A profound observation! It deserves to be kept in mind constantly as we fumble along in attempts to do good to others.

The greatest charity of all, in the light of this apothegm, would be to assist a person toward becoming wholly self-reliant within nature’s limitations, and therefore totally free. The nonmaterial, noneconomic things of the mind and spirit are supreme to this end and therefore comprise the greatest charity. Bread and raiment and abode are trivial indeed as compared with these, in the furtherance of human progress.

The greatest aids to self-reliance are educational, broadly speaking — the tools for pursuing the eternal embryo of truth. The root of progress is a sincere love of truth per se. Devotion to truth in the abstract must surpass love for any specific belief one holds at the moment, if the pursuit is to continue rather than to bog down in stagnant dogma. Exploratory shoots can then sprout from these roots in the form of specific “truths” — more accurately, mere beliefs — however dimly and even erroneously they may be seen at any moment. Among these sprouting shoots will be some sound ones capable of bearing the economic fruits and other passing joys of our daily living.

With things of the mind and spirit duly recognized as the greatest charity of all, this essay will explore one aspect of economic charity. When the word “charity” is used hereinafter, I shall be referring to charity in its economic form according to one definition given in the Oxford Dictionary — material benevolence, sometimes called alms or munificence or philanthropy.2

The social fashion of our age is the attempt to do good to others in a confused profusion of economic transfusions. Other times have been less afflicted in this respect for the simple reason that they could not afford as much waste as we can. For them, sheer survival of self and family absorbed nearly all their effort.

The charitable endeavors characteristic of our time are, in my opinion, often futile for their intended purpose. In fact, they may even be harmful to the recipient by making him less self-reliant than before. According to the Talmudical definition of the noblest charity, whatever reduces self-reliance is negative charity.

I believe there is another use for this vast amount of time and energy that would support a positive charity, fruitful beyond the fondest dreams of most persons. The prevailing notion is that such a use is wholly selfish. But its charitable aspect can be seen by testing it step by step against certain requisites of true charity.

The Nature of Charity

True economic charity has three characteristics:

1. Charity requires the transfer of ownership from one person to another of something having economic worth. The receiver must get a clear title to it, or it cannot be charity. The giver must have had clear title to it, or the giving is like a gift of stolen property — which is not an act of charity. Private ownership at both ends of the transfer, never public ownership, is therefore required.

2. The transfer must be voluntary with both parties. If forced upon the receiver against his will, it is not charity. If taken from the source against the prior owner’s will, it is theft rather than an act of charity.

3. True charity requires anonymity. This is difficult to attain, to be sure. But if the conditions of the transfer result in a personal obligation in any form or degree, it is a grant of credit and not an act of charity. Devices other than anonymity usually fail to prevent the creation of a personal obligation.

It is a temptation to list as a fourth requirement that the gift shall, in the long run, be beneficial to the recipient. This aspect is important, but it tests the wisdom of the giving and not its charity.

The third requirement of charity — anonymity — is in harmony with the biblical admonition that one who gives alms should not sound his trumpet before him as do the hypocrites.3 If the act is motivated by vainglory, it is not charity; it is then merely salve for the ego of the giver. If the giver expects repayment in any form or degree, other than in unselfish personal satisfaction, it is something other than charity.

These are strict requirements for true charity and most “charitable” activities would fail to qualify.

Enslavement through “Charity”

Unfortunately a common purpose of acts of “charity” is to entice somebody to become obligated to the giver. The way it works is this: Under guise of a gift or personal favor, an unspecified quid pro quo is assumed. “Some day you can do something for me.” Perhaps it is some business favor in that wide arena where an unfree market allows special privileges to be traded. Such acts obligate the receiver for an amount not agreed upon in advance. There is no specific quid pro quo as with a loan or an outright trade. So the act of “charity” really becomes a debt that can never be repaid with precision because the amount of repayment is not known by both parties by prior agreement.

An attempt to repay such an obligation almost never satisfies both parties. A residual obligation, one way or the other, becomes suspended in uncertainty forever. That is why anonymity is required if this pernicious feature is to be avoided. Credit should be correctly labeled as credit and trade should be called trade.

The process just described is really a means by which one person permanently obligates himself to another. It is really a moderated form of enslavement.

Plutarch must have had this in mind when he said, “The real destroyer of the Liberties of any people is he who spreads among them bounties, donations, and largesses.” Plutarch’s other comments make it amply clear that he was not opposed to real charity. But he was opposed to the sham of charity that feeds the vainglory of the giver and enslaves the recipient.

Aesop’s fables — presumably written by a wise slave who had astutely observed these processes — repeatedly pointed out the dangers of enslavement under guise of charity.

False charity destroys security. Having once allowed one’s self to become permanently obligated to another by debts that can never be repaid, the recipient loses his self-reliance and becomes insecure. As St. Thomas Aquinas expressed it, “There is no security for us so long as we depend on the will of another man.”4

Just as one person can allow himself to become enslaved to another by a debt that cannot be repaid, so can persons within a group allow themselves to become enslaved to the group. 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.

There is not space here to trace in full the ideological ancestry of mass enslavement in this way, but the influence of Rousseau and Marx should be mentioned in passing.5 Rousseau, though he pleaded for “back to nature” in the education of Emile, was untrusting of natural self-reliance in economic and social affairs. So in his Social Contract he revived Plato’s cult of reliance upon the state and became, according to Janet, the uncontested founder of modern communism.6 Then Marx later built further upon the same concept when he said that man is merely a complex of social relations, and that he is responsible to society for his real existence. For if one really owes his existence to society because his life depends upon society, he then owes servitude to the state or to some other collectivity of society. That is how men like Rousseau and Marx, with their mass programs of social dependency and socialized “charity,” have helped socialize masses of humanity into dependency, insecurity, and slavery.

Enslavement on either a personal or mass basis could not happen if charity were to be kept in pure form, supplementing free exchange and voluntary credit arrangements between persons.

Common Forms of Charitable Activity

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.

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. But little giving is direct from the giver to the object of need — often the sufferer from some physical ailment or the victim of devastation from “acts of God.” Most is given to some organization which acts as an intermediary.

If one will tabulate requests of all types during a year, it will become evident how numerous are the forms of request for charitable assistance. A few solicitors still stand on street corners with their tin cups. But most solicitation stems from intricately organized endeavors to wrest funds from would-be givers, frequently with the aid of the fund-raising profession. Often goodly neighbors are enlisted as unpaid solicitors to knock at one’s door, and the giving in many instances is really little more than the cost of peacefully evicting a well-intentioned trespasser.

In doubting that much of this sort of thing is charity at all — at least not the wisest form of charity — I am not questioning the right of anybody to support anything voluntarily with his own means. I am merely questioning his wisdom and suggesting a better alternative. His glow of self-satisfaction over having given in the usual way is no more assurance of its wisdom than any other misguided but well-intentioned act. One can grow in wisdom only as he is willing to review acts he previously judged to be wise.

Tools as a Form of Charity

Both fact and logic seem to me to support the view that savings invested in privately owned economic tools of production amount to an act of charity. And further, I believe it to be — as a type — the greatest economic charity of all.

By economic tools of production I mean, of course, things with exchange value — trucks, factories, railroads, stores — which assist human effort in the production of other items of economic worth.

Does saving and investment in these tools qualify as charity? Does it meet the three tests of an act of charity?

The first test is whether there has been a transfer of privately owned things having economic worth. It is true that when one saves and invests in a tool which he uses in production, although he retains title to the tool, most of the extra production which the tool makes possible passes on to others, as we shall see. For that reason the first requisite of an act of charity seems to be met as a certain consequence of saving and investment in tools. It is this feature of the creation of privately owned capital which is its charitable aspect.

The second test of charity is that the transfer of economic benefits shall be voluntary. Did anybody steal anything? Was anybody coerced? So long as the tools are privately owned and their use functions in a free market, the process has to be voluntary for everybody involved. But state ownership or control of tools, as is common in Russia, violates this requirement.

The third test of charity is anonymity. The charitable feature of savings and tools arises from the extra production that flows from it as a consequence and which goes in large degree to others than the one who saved and invested in the tool — to others than the owner of the tool. It is anonymous because the beneficiaries do not know its source. Most of them do not even know how they are benefiting from it at all. They do not know this because they have been victimized by a thorough saturation with the surplus value theory. They even think of themselves as being victimized by these capitalists who own the tools they are using.

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. This illustrates the anonymity of the millions of unknown persons responsible for the things we enjoy.

So savings and the tools of production meet all three tests of charity, and thus qualify as charity. How many of the things we commonly call “charities” can equally qualify by these three tests?

The Productive Power of Tools

A large part of the high level of economic living we now enjoy in the United States arises from the use of tools.

The average person in the United States has available for consumption upwards of ten times that of persons in the less prosperous half of the world. The reason for their poverty is a lack of savings invested in tools of production. In all their history over the ages they have accumulated little beyond the most primitive and simple tools, such as crude plows and hoes.

Harder work by us is not the reason why we can enjoy ten times as much economic welfare as they do. Persons in the United States work no harder, if as hard, as do the poorer half of the world’s population. Even including mental work along with sheer muscular effort, both of which contribute to output, I doubt if we work any harder — overall.

Nor does innate intelligence seem to explain the difference. We probably have no more geniuses per thousand population than they do.

Lacking any of our accumulation of tools, our output per worker probably would be even lower than that of the poorer half of the world at the present time; even their production is aided considerably by their simple tools. Comparison of their output with ours suggests that without any tools whatsoever our output would be reduced to perhaps one-twentieth of what it now is. To say it another way, perhaps 95 percent of our present output in the United States is made possible by the presence of our tools. These tools are available because in the past some wise people saved and invested in tools.

Who Gets the Output Due to Tools?

The next question is, Who gets this great increase in production? Evidence shows that a large part of it goes to others than those who did the saving and who hold the titles of ownership to the tools. It goes mostly to those who use the tools.

It has been estimated that only about 15 percent of the national income in the United States goes to the owners of capital as current income.7 This is the amount of dividends, interest, rents, and royalties together with their equivalents in owner-operated businesses. The other 85 percent of the national income is paid currently for work, as distinguished from pay to owners for savings they have invested in tools. This figure for current work includes both wages paid to employees and its equivalent to those self-employed.

The question at once arises as to why so small a proportion of the product goes for capital, when capital is so highly productive? If we were to assume that those who save and invest in tools are entitled to the full increase in output that comes from the use of these tools as an aid to manual labor, it would appear from the evidence already given that justice would decree a division about like this: 95 percent for the owners and 5 percent for the users.

And so we may summarize:

Presuming these figures to be accurate, one must conclude that the saver-investor is receiving less than one-sixth of the return which his saving and investing has made possible — 15 received from the 95 produced. The other five-sixths of the increase goes to the users of the tools, enhancing their pay seventeen times — 85 received and 5 produced.

A person is lucky if by chance he happens to have been born in the United States where he can share directly in the bounty tools create. By having been born here he is enabled to work with tools that are now available because others have saved in the past. His income from current effort will, by these figures, be enhanced 17 times (85 versus 5) because of these tools. Had he been born where no tools had been accumulated whatsoever but would have to work as hard or even harder than in the United States, he would be getting only 1/17th as much for his labors.

This bounty to the users of tools is what I call the greatest economic charity.

Surplus-Value Theory Reviewed

These facts are significant in appraising Marx’s surplus value theory. Marx said, in effect, that the 15 percent which goes to the owners of the tools is surplus value because the user of the tool — according to Marx — deserves the full 100 percent.

It is from the productive power of tools as aids to the manual efforts of man that something which might be called a surplus value arises. This surplus, as has been indicated, has raised US production from a level of 5 to a level of 100. So a counter claim to that of Marx would be that the full increase of 95 (100 minus 5) — the amount of surplus value created by the tools — should go to the one whose savings created the tools. But who really gets this surplus value of 95? The owner gets 15 and the user gets 80. Not a bad deal for the user!

Surplus value of a different sort arises in every instance of voluntary exchange in a free market. If one farmer trades a bushel of wheat to a merchant for a shirt, it is because the farmer prefers the shirt to the wheat and the merchant prefers the wheat to the shirt. The trade creates a surplus value for each of the participants, but the amounts of surplus value thus created are not subject to measurement by any device we now know or can contemplate. They are compensating in direction but not necessarily in amount, because the amount is entirely a matter of subjective appraisal. Being unknown in amount by both parties and probably not even thought of in these terms at all, no sense of residual obligation is created. This makes the process closely akin to anonymity. The center of interest of this discussion, however, is surplus value of the type created by tools as an act of economic charity. Therefore the phenomenon of surplus value created by exchange will not be dealt with further here.

In a free economy the process of deciding the division of the surplus value created by the use of tools occurs in the free market. We must accept the decree of private ownership and free exchange as having fairly decided the division, whatever the answer. Yet the answer given in the free market reveals that private capitalists — the “selfish owners,” as those who save and invest are so often called — are really the greatest charity-givers of all.

It is also interesting to note the magnitude of charity arising from private capital in relation to “religious and welfare activities” contributions. About 2 billion dollars are given to religious and welfare activities in the United States each year. This is less than 1 percent of the amount of charity which the users of tools receive in their pay envelopes, according to this concept, in the same length of time.

Bread vs. Seed Grain

I would certainly not scorn the giving of bread to a starving person in need. Nor would I scorn any other endeavors of a charitable nature by agencies which conduct recurrent campaigns for funds and materials for needy persons, so long as the offering is voluntary with one’s own means. But I would emphasize strongly that the urgency of the plight of the needy can blind one to the possibilities of this greatest charity of all.

Those who benefit from the charity that flows from the creation of tools are the persons engaged in productive labor. This makes an excellent claim to worthiness, for as Samuel Johnson once said, “You are much surer that you are doing good when you pay money to those who work, as the recompense of their labor, than when you give money merely in charity.”8

If we will but pause long enough to view with wider perspective the consequences of some of our customary acts of presumed charity, we can see their short-sightedness. Perhaps we should view with some question even the giving of grain to a starving person, if the same grain could better serve as seed for a harvest that would keep 20 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.

When a neighbor knocks at one’s door for a contribution to some charity, it may seem selfish to wonder if perhaps greater good could not be done by buying a share of new investment stock instead. But such an alternative is worth pondering, even with the perspective of charity in mind.

Many foundations have been established to engage in charity with the accumulated profits from the use of tools created in an earlier day. It may be a novel idea to suggest that greater charity might have been the consequence if these funds had been reinvested in new tools rather than to be used for direct-consumption charity, wherever that has been the policy. Use of foundation funds for the purpose of research and discovery is, of course, another matter because it is the creation of a form of tool and therefore highly charitable in its effects.

The one point I wish to make above all others is that, whereas a crust of bread may save a man from starving for a short while, the creation and use of tools are the only effective means by which people can be pulled completely out of the mire of poverty and placed on the solid base of sustained plenty. One cannot heal all the sick, relieve all the poor, comfort all in distress, nor father all the fatherless. And so it is important that in one’s efforts to do good he lend his limited support where it will bear the most fruit on a long-time basis — after he is gone and after his own direct efforts have ceased.

The Incentive Factor

There must be some incentive if there is to be saving and investment in tools. This is best done by private ownership. The nature of man being what it is, the prospect of some rewards under private ownership surpasses all other incentives. A carrot will entice the donkey better than a whip will drive him.

The label of charity on anything having as a motive any personal gain at all will probably be questioned by many. They will say that, unless 100 percent of it is relinquished, none is truly charity. But I would pose some questions in reply. Does the fact that a person gives only 10 percent of his yearly income, not 100 percent, deny any of his gifts being charity? Does the fact that a charitable agency uses part of its income for organizational expenses deny any of it as being charity?

He who would serve his fellow men by charity can best do so by saving and investing in tools. Even though he may benefit himself a little, in the process, he unavoidably and anonymously benefits others by many times as much.

One who would be wholly self-sacrificing in the matter is free to refrain from any personal benefits in consumption at all, if he wishes. He can do this by reinvesting his profits in more tools. He can use that small part of the product of the tools which the free market allocates to him in the form of owner-reward to extend this greatest charity, foregoing all personal gain beyond the title to tools which are wholly benefiting others.

Beating Communism at Its Own Purpose

Has socialism-communism anything to offer to compare with this? Can their proposals benefit mankind in any such way, even though the capitalist may get a little out of it for himself? Do they have any such benefits to offer the commonweal in a parade of progress, benefiting his children and his children’s children on a continuing basis?

No. A socialist-communist regime, instead of being truly charitable, kills off this greatest charity of all. Taxes for “public welfare” kill the goose that lays this golden egg of charity. As taxes increase more and more and the chance for reward disappears, savings and venture are discouraged more and more. As rewards become thinner, the players turn away from the game. Original hopes of a charitable plenty turn into a poverty enforced by orders and police measures.

There is always the danger that when one has grasped the idea of the productive power of tools he will propose confiscating funds from private citizens in order to build more tools. But this denies the very process of charity. One person cannot be truly charitable with funds which he steals from another, any more than church collections can be increased by having the members of the congregation pick each other’s pockets every Sunday. If tried, the source will dry up because those attending will learn to keep their pockets empty or else stay away from church.

True charity must remain purely private rather than public and socialized. It must be voluntary. That is the nature of the greatest economic charity of all — savings invested in privately owned tools of production.

Conclusion

The intent of this essay has been to bring into focus the conflict between two views toward economic charity, and to give a basis for choice between them.

An analogy may illustrate the difference. According to one view, sharing a crust of bread is advocated as the method of charity. The other advocates savings and tools for the production of additional loaves of bread, which is the greatest economic charity.

The two views are in conflict because the two methods are mutually exclusive in absorbing one’s time and means in all the choices he makes day by day. These cannot be twice used.

The reason for the difference in view really stems from different concepts about the nature of the economic world. The former view stems from the belief that the total of economic goods is a constant. The latter view is built on the belief that expansion in production is possible without any necessary limit.

The difference between the two views is like the difference between a two- and three-dimensional perspective of production. The two-dimensional size is fixed at any instant of time, but the third dimension and therefore the size of the total is expandable without limit by savings and tools.

If the total of economic goods were fixed, it might seem humane to spend all one’s time dividing it into pieces and carrying them here and there. If man is assumed to be selfish, voluntary methods would seem inadequate and centralized control of supplies and their distribution would seem to be necessary — if only there could be any assurance of finding unselfish men to rule.

All the history of mankind denies that there is a fixed total of economic goods. History further reveals that savings and expansion of tools constitute the only way to any appreciable increase. Christ seemed to be telling us this in the story of the talents, 2,000 years ago.9 Were we to grasp fully the meaning of this story, concepts about what is the best form of economic charity would undergo a revolutionary change.

The greatest economic charity is that which enables persons to become independent of alms and therefore most self-reliant and secure under freedom. Only when that happens — when persons advance from the brink of starvation — is time released for devotion to things of the mind and spirit, which comprise the supremely great charity.

This article is excerpted from On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises (1956).

• 1Paraphrased by Mary Baker Eddy from Moses Maimonides in his Code of Jewish Law, Chapter X, paragraph 7.
• 2Some will resist my use of the word “charity” in connection with the object of my acclaim. They will point to the earlier meaning of the word, which refers to a mental attitude of brotherly love and compassion. Yet standard works on the meanings of words reveal no substitute that seems lacking in the same sort of difficulty. All have multiple meanings, and are generally given as synonyms for one another. In fact, the word “charity” has come to refer increasingly to some form of almsgiving rather than to its earlier meaning. So I decided to hazard its use for want of anything better, in the hope that most of those who will be reading this essay will be charitable enough to try to glean my meaning and intent.
• 3Matthew 6:2.
   
• 4Acton, Essays on Freedom and Power, p. 64.
• 5Thomas Davidson, Rousseau and Education According to Nature (1898); also, Leopold Schwarzschild, The Red Prussian, the Life and Legend of Karl Marx (1947).
• 6P. Janet, Les Origines du Socialisme Contemporain, (1883), p. 119.
• 7F. A. Harper, The Crisis of the Free Market, 1945, p. 66.
• 8James Boswell, The Life of Samuel Johnson, Charles E. Lauriat Company, Boston, 1925-Vol. II, p. 636.
• 9Matthew 25.