This question comes up whenever I discuss philanthropy.

It would seem that capitalism is better than charity. The countries that became permanently rich, like America and Japan, did it with capitalism. This seems better than temporarily alleviating poverty by donating food or clothing. So (say proponents), good people who want to help others should stop giving to charity and start giving to capitalism. These proponents differ on exactly what “giving to capitalism” means - you can’t write a check to capitalism directly. But it’s usually one of three things:

1. Spend the money on whatever you personally want, since that’s the normal engine of capitalism, and encourages companies to provide desirable things.

2. Invest the money in whatever company produces the highest rate of return, since that’s another capitalist imperative, and creates more companies.

3. Do something like donating to charity, but the donation should go to charities that promote capitalism somehow, or be an investment in companies doing charitable things (impact investing)

I agree that overall capitalism has produced more good things than charity. But when I try to think at the margin, in Near Mode, I can’t make this argument hang together. Here’s my basic objection:

Consider some company. I’m going to pick Instacart, because I like it and use it often. Instacart is like Uber for groceries. It delivers them to your house, so you don’t have to go shopping. It’s great if you’re lazy, or if you’re sick and don’t want to leave the house. I’m not putting my finger on the scales by choosing Instacart here. Instacart is great.

Instacart makes yearly profit of $500 million, yearly revenue of $2.5 billion, and has 10 million yearly customers (who I guess pay $250 each per year?) and a market cap of $10 billion. For complicated reasons I’ll relegate to a footnote¹, I’m going to summarize the deal that Capitalism offers by allowing Instacart to exist to “For $1 million, you can give 2,000 people a great deal on grocery delivery”.

Compare this to a good charity, like GiveWell’s pick Dispensers For Clean Water. If I understand their claim right, per $1 million they can give 50,000 people clean water for ten years, which would probably save about 1,500 lives.

So which is a better use of $1 million? Give it to Capitalism, and give 2,000 people a great deal on grocery delivery? Or give it to Charity, and give 50,000 people clean water and save 1,500 lives? Even without being able to exactly quantify the value of grocery delivery deals vs. clean water, common-sensically Charity wins on first-order effects.

So the argument for Capitalism must go through something about second-order effects. But what are these? I can think of a few possibilities:

• Job creation: Along with helping its customers, Instacart employs 10,000 full-time employees and 600,000 gig workers, so our $1 million investment might produce a few dozen jobs. That still doesn’t seem to counterbalance the advantage of Charity. But also (and I admit I have trouble thinking about this), it doesn’t seem obvious that Instacart “causes” jobs. Suppose Instacart had never been founded. Then people would spend whatever money they now spend on Instacart on something else (let’s say booze and porn), which would also create jobs (for brewers, bartenders, and porn stars). There’s no particular reason to think spending the money on Instacart creates more jobs than spending it on those other things would. So how many jobs does Instacart create over replacement? I’m not sure but I think it must be much less than the official number of employees.

• Replaceability: I actually think this one favors Charity. If nobody had invested in Instacart, surely “grocery delivery” wouldn’t remain an unfilled niche forever. But there’s lots of room for more money in Dispensers For Clean Water, and I think any money you don’t send to them simply won’t be spent on water dispensing.

• Permanence: Instacart is self-sustaining: after some initial investment, its profits pay for its benefits to continue forever. But Dispensers For Clean Water only promises that its water dispensers will last for ten years. So this is a genuine benefit for Instacart, depending on how you count “forever” in your calculations. On the other hand, the lives saved by Dispensers are saved forever (at least until the person dies for other reasons).

• Second Order Effects: Instacart pays its employees, who then go on to stimulate the economy somewhere else. And it saves its customers time, which they can spend on productive economic activity. On the other hand, saving people’s lives allows them to engage in productive activity too. Fewer diseases mean families can spend more money on things other than medical care, and fewer childhood infections potentially means higher IQ and potential as an adult. I don’t think Instacart trivially wins this one either.

• Some sense in which the US is rich and a good place to live, and each successful company contributes to this. I don’t think this is a second-order effect, just a sum of first-order effects. The US is rich and pleasant in the sense that (some) people have nice houses, good cars, and cheap grocery delivery. Instacart contributes to the cheap grocery delivery, and other companies provide the nice houses and good cars.

• Return on investment. If you donate to charity, various good things happen. If you invest in Instacart, various good things happen and you get more than your original amount of money back (which you can then spend on something else). I agree this is an important distinction, but I think once you factor in the discount rate of money it doesn’t change things by more than factor of 2 or so.

Maybe a remaining counterargument would be that Instacart is a bad example, and I should be talking about companies that provide more vital services, like the electric company, or the dairy farms that produce milk? But I think that starts to get away from claims (1) and (2). I’m going to be buying electricity and milk regardless of how much I give to charity, because these are necessities. My marginal dollar (that I might give to charity) would otherwise be spent on luxuries like Instacart. And Instacart has gotten better return on investment in the past few years than the local utility company…

RIP

…so this doesn’t support the “invest in whatever companies give the best rate of return” narrative either.

What’s left is strategy 3:

Do something like donating to charity, but the donation should go to charities that promote capitalism somehow, or be an investment in companies doing charitable things (impact investing)

I find this promising, but I don’t know what a good charity along these lines would be.

There are some charities that send economists (or other professionals) to developing countries and advise them on how to do more capitalism. This kind of development aid has been roundly criticized and did especially badly in Russia. I’ve supported some of these that seem especially careful in the past, and would be willing to support them more if someone found a very good one with a strong track record.

(also, I’m concerned that even though rich countries got rich because of capitalism, it’s no longer that easy for poor countries to get rich with the same type of capitalism - existing rich countries will outcompete them - and we’re not entirely sure how to help poor countries get rich now, although probably good institutions are always better than bad institutions)

I am partial to Charter Cities Institute, which helps advise developing countries on creating charter cities that have better governance and less corruption than the rest of the region. But EA evaluator group Rethink Priorities has a report on why they don’t think this is quite as valuable as traditional charity (they’re not sure special economic zones consistently make areas develop faster, and they think this finding should be applied to charter cities too). Here’s CCI’s counterargument (they think SEZs aren’t a good reference class for the charter cities they want). I think both sides make good points but I’m currently more convinced by Rethink Priorities’ (although I do still donate to CCI sometimes).

Finally, you could invest in developing-world projects and companies that seem unusually likely to make an overall economic difference there. I’m nervous about this because of China’s Belt and Road initiative, which did this at huge scale for infrastructure, but doesn’t seem to have done much good (and might have done some bad). Also, I’m not smart money, which means I’m exposed to adverse selection - if there’s a company that can’t raise enough money to build a dam in Kenya and needs your charity dollar to make the budget work, why hasn’t Wall Street come through for them? One plausible answer is “because it’s a bad company with a bad plan”. Admittedly another plausible answer is “because it has a 5% RoI, the next Instacart has a 6% RoI, and so Wall Street would prefer the next Instacart but you as a charitable individual should prefer the Kenyan dam.” I would potentially be willing to believe this if some smart charity evaluator would tell me which projects were good. But $1 million only gets you a fraction of a dam, and does get tens of thousands of clean water dispensers, so I would also want someone to present the specific case for why the dam would be better (not just the heuristic “capitalism is always better than charity”).

I’m willing to believe that some capitalist charities - whether these are development aid think tanks, or investment in developing-world projects - could potentially be better than usual charities. The reason I’m not donating to these is that nobody’s done the hard work of identifying these and calculating their expected value, and I don’t feel qualified to do that work myself. I have a high prior that any nonprofit that hasn’t been rigorously shown to be good is probably bad, and the potential advantage of capitalism over normal charity usually isn’t enough to overcome my decreased certainty in its efficacy².