Creative Capital in America

Invention is the mother of necessity.¹³

The worst way to organize an economy is for the central government to amass all the capital—by taxing its citizens heavily or by owning all enterprises itself—and then for that government to decide how the capital will be deployed. The Soviet Union paid with its life for its stubborn commitment to a centrally planned economy, and (as I noted in Chapter 1) China is headed down this same path. On a smaller scale, the economies (and, to a considerable extent, the societies) of Cuba, much of Central and South America, and most of Africa were destroyed by top-down economic systems.

The best way to manage an economy is to allow it to manage itself as freely as is possible without tolerating monopoly profits or other forms of illegal or predatory activity. In such a society, decisions about the use of capital—before and after it has been earned—will be pushed down as far as they can go. In terms of the deployment of wealth after it has been earned, those decisions are made in the United States at the individual wealthy family level. Wealthy families are, by definition, the only ones who possess excess capital, that is, wealth far beyond what will be needed to provide comfortable lives for themselves. (Middle income families, by contrast, have savings: capital that is not needed today, but that is expected to be needed by those families in the future.)

The effectiveness with which a society deploys its privately accumulated capital will in important part determine its competitive success against other societies. This is nothing more than a special case (though a very important one!) of the rule that the most successful societies will be those that most effectively maximize the talents and capabilities of their citizens. Private capital, in other words, is one of the important competitive strengths of a nation, like extensive natural resources, a democratic political system, or the vigor of its population.

Creative capital in America is a force for vitality, change, and competition in virtually every aspect of American society, from the arts to the academy to intellectual leadership to the formation of new businesses—in short, for every worthwhile endeavor that cannot support itself financially ab initio, if ever. We tend to recognize the role of private capital in philanthropy, but it is worth repeating: No arts or cultural organization, no institution of higher education, no journal of ideas, no small press, nor most other worthwhile social and cultural activities are able to support themselves financially without the assistance of charitable contributions.

All these activities depend on the existence of private capital and the willingness of the owners of that capital to put it at risk by supporting those activities. I say “at risk” both because there is rarely any assurance that philanthropic dollars will be used effectively, but also because it is often the case that support for cultural, intellectual, and educational activities winds up being support for individuals and ideas that are hostile to everything that allows private capital to be generated and deployed. This willingness to have the system constantly subjected to criticism and evaluation by its own dependents is one of the most astonishing things about vigorous free market democracies, and it is an aspect of the system that keeps it fresh and dynamic.

Most Americans are at least vaguely aware that our system of private philanthropy is dominated by wealthy families, but few realize just how dominant the role of those families is. There are over 300 million people in America. But I estimate that nearly 10 percent of all charitable giving—including middle class giving, which goes overwhelmingly to churches—comes from a mere 500 families. To save you from doing the math, this means that roughly 0.000002 of the people give 10 percent of the money. And if we eliminate from the notion of private philanthropy any giving that goes to religious organizations—which accounts for the overwhelming proportion of middle class giving—the dominance of the wealthy would be vastly greater.

This phenomenon can also be demonstrated by looking at how American nonprofit organizations raise the capital necessary to fund their operations. Let's look specifically at a college that has decided to mount a $100 million capital campaign. Any fundraising professional could sit down and in five minutes sketch out a capital campaign giving pyramid showing how many and what size contributions the college will have to raise to be successful in such a campaign. Specifically, the college would have to receive:

• 3 contributions of $10 million each
• 4 contributions of $5 million each
• 5 contributions of $2.5 million each
• 8 contributions of $1 million each
• 15 contributions of $500,000 each
• Many, many smaller contributions

We can easily do the math to see that contributions from wealthy donors will represent $78 million of the $100 million campaign. In other words, out of the thousands of contributions the college hopes to receive, only 35 really matter.¹⁴ Indeed, unless and until the college receives about 60 percent of the total needed—probably from no more than a dozen people—it won't even announce the campaign publicly.

The point here is not that the wealthy are necessarily more or less generous than other citizens, but simply that the American system of private philanthropy could not persist without the creative capital of the wealthy. Our vaunted philanthropic system would not just shrink—it would collapse altogether if creative capital ceased to exist.

Certainly we could raise taxes substantially and leave it to the central government to decide which cultural activities are deserving of support, which ideas should be backed and which extinguished, who should be educated and how, which religions are legitimate and which aren't. We could, but we don't, and as a result of the richness of the millions of individual decisions made by individual families, America dominates the world of arts and ideas, and its higher education system is not merely the envy of the world, it is the only higher education system globally that is worthy of the name.

If for no other reason than this extraordinarily successful system of private charity, we ought all to care a very great deal about the quality of the stewardship of private capital in America. If we cease to allow private capital to be produced, or if we place serious constraints on how that capital can be spent, or if we allow the stewardship of private capital to be so poor that it withers or disappears, much of what makes America successful, and most of what makes the American version of capitalism so singular, will wither along with it.

Consider that at the very moment that Marxist doctrine was fueling the anger that led to the Russian Revolution, the wealthiest man in the world—Andrew Carnegie¹⁵—was giving away all his money. Carnegie was an extraordinary person in many ways, but he was hardly the exception that proves the rule. In other words, Carnegie was not a gentle, soft-hearted fellow who somehow managed, in competition with the most ruthless industrial captains in the world, to become the wealthiest living human. Carnegie was, in fact, a barracuda. Among other things, he was capable of ordering an end to the Homestead Steel Strike in 1892 no matter what the cost in lives,¹⁶ then slipping out of the country so that the blame would fall on his friend and colleague, Henry Clay Frick.

Carnegie would turn out to be not an isolated example of extraordinary benevolence, but a role model for the millions of wealthy Americans who made their money in ways that benefited the society and then gave it away in ways that benefited the society yet again. Carnegie in effect invented the idea of creative capital, an idea that continues to be the definitive role of wealthy families in America to this day.

Carnegie, Rockefeller, Mellon, E. I. du Pont, Ford, Bill Gates, and Warren Buffett are examples of creative capital on a very grand scale, but, as we will see, there are innumerable examples of creative capital being deployed on a smaller, but still important, scale. Let's take a look at the role of creative capital in several spheres of American life by examining specific examples of important ideas that would not have survived but for the support of private capital.