People spend more and save less than they would if they had no pure time preference and were longer-lived … By contrast, an impartial philanthropist may not be inclined to discount benefits to her beneficiaries purely because they are in the future, and she might care about present and future generations equally. That is, she may be patient. From her perspective, the world spends too much of its wealth each year and saves too little … Therefore, a patient philanthropist can typically do more good (from her perspective) by investing for the sake of future spending than by spending immediately.
Trammell, “Patient philanthropy in an impatient world“
1. Introduction
This is Part 3 in my series on billionaire philanthropy. Part 1 introduced the series, and Part 2 discussed the uneasy relationship between philanthropy and democracy.
In particular, we saw in Part 2 that billionaire philanthropy needs to be understood in light of an institutional context in which the rich are getting richer, the poor are getting poorer, and the rich are increasingly able to use their wealth to influence fundamental social and political institutions in society.
A common response to concerns about billionaire philanthropy is to plead innocence of the present financial and political system. “It is not our fault”, the response goes “that there are billionaires. But given that there are billionaires, isn’t it better to steer them towards philanthropy instead of megayachts?”.
However, effective altruism does not take it as a given that there are billionaires. Effective altruism actively strives to create billionaire donors in at least two ways. First, effective altruism encourages its members to earn to give, working within traditional institutions to amass wealth that can then be donated to effective charities. One of the poster children for earning to give was Sam Bankman-Fried, who explains on the 80,000 Hours podcast how he was driven by his commitment to earning to give to make, and donate, a fortune.
Second and more subtly, effective altruism strives to create billionaire foundations through patient philanthropy, a slow process of accumulating wealth that will be the subject of today’s post.
But first, the punchline. Insofar as effective altruism actively encourages the creation of billionaires, the movement cannot plead innocence of the financial and political system they create and sustain. We will look today at the institutional context in which patient philanthropy takes place, and the systemic consequences that patient philanthropy is likely to have.
I have said before that one of the things I admire about effective altruists is their ability to raise funds. Perhaps billionaire philanthropy is the price of effective fundraising. But we need to take an open and honest look at the price of billionaire philanthropy to make sure the price is one that we wish to pay.
2. Patient philanthropy
Humans are impatient and short-lived. We are willing to pay a premium to receive benefits now rather than later.
Suppose you are patient and very long-lived. Then, you can make a mint by investing patiently. In the long-run, patient investments reliably outpace inflation, in many models by several percentage points per year. On a scale of decades, this is the familiar practice of retirement saving. But what if you were to save for centuries or millennia in an impatient world? After a while, you would become quite wealthy.
This is the idea behind patient philanthropy. The practice dates back at least to Benjamin Franklin, who left $2,000 each to the cities of Philadelphia and Boston, with the stipulation that some of the principal would be paid out after 100 years, and the remainder would be paid out after 200 years. When the final principal was paid out in the 1990s, it was worth almost seven million dollars.
What if we were to replicate Franklin’s experiment on a much larger scale? Enter Phil Trammell.
Trammell is a DPhil Student in economics at the University of Oxford and a longtime colleague of mine at the Global Priorities Institute. Trammell is known for his impressive rigor, clarity and work ethic, and a talent for bringing economic research to bear on altruistic decisionmaking.
In his paper, “Dynamic public good provision under time preference heterogeneity: Theory and applications to philanthropy“, Trammell describes the optimal behavior for patient philanthropists, who want to do the most good without consideration of when and where the good is done. Trammell considers how patient philanthropists should spend their money, and how much they should be willing to pay for the right to spend patiently when they are the sole funders in the market, as well as when they are paired with a variety of impatient competitors.
A broad upshot of Trammell’s work is that under many scenarios, patient philanthropists should be willing to save most of their money for decades, or even centuries, before disbursing it. This insight led to the creation of the Patient Philanthropy Project at Founders Pledge, a patient investment fund which achieved capitalization in the millions of dollars shortly after its founding in 2021.
(You can read an informal summary of Trammell’s work here, or listen to Trammell discuss patient philanthropy on the 80,000 Hours podcast here).
In one of the most striking passages from his paper, Trammell develops two models of optimal savings behavior by effective altruists against a range of impatient competitors. In the least drastic scenario, optimal behavior leads effective altruists to spend nothing for 424 years, at which point they will have accumulated 46% of all societal wealth. In the most drastic scenario, effective altruists save for 437 years, at which point they own virtually all of society’s wealth and find themselves indefinitely in control of our future destiny.
Now patient philanthropy begins to look a bit less innocent. In scaling up Franklin’s patient experiment, we raise the possibility for philanthropists to seize control of a sizable fraction of societal resources through patient philanthropy. Could this be taking Franklin’s insight too far?
In fact, analogs of patient philanthropy have led in the past to precisely the sort of philanthropic wealth accumulation envisioned by Trammell’s scenarios. Let’s look at how this happened in the past, and how society reacted to it.
3. The history of patient philanthropy in the Ottoman Empire and Mexico
The Ottoman Empire recognized an early precursor to the modern philanthropic foundation, the waqf. Waqfs were often established to fund buildings such as mosques, soup kitchens, and schools. Like modern foundations, waqfs were allowed to operate over an indefinite time horizon and were given substantial tax advantages.
Over time, waqfs grew increasingly wealthy as their property and investments slowly accumulated value. For example, the Hasseki Sultan waqf was established in 1552 to operate a single soup kitchen in Jerusalem, but within four centuries the waqf had amassed a substantial property portfolio, including 26 entire villages and a number of valuable shops, bathhouses and other properties.
It is not just individual waqfs that accumulated power and wealth. Large parts of Ottoman society were slowly sold into the ownership of waqfs. For example, by 1923 at least three-fourths of all arable land in modern-day Turkey was owned by waqfs.
Although Ottomans appreciated the benevolence of waqfs, they were deeply uncomfortable with the growing wealth and influence of waqfs. A feeling spread that the nation had somehow, without quite meaning to, mortgaged itself to philanthropists. After the dissolution of the Ottoman Empire, the situation was resolved peacefully through land reforms and other policies, redistributing a good deal of waqf assets back to public and private ownership.
In other countries, matters were not so peaceful. In the buildup to the Mexican revolution, ordinary Mexicans found that increasing amounts of land were owned by large landholders, including not only foreign corporations but also, in large part, the Catholic Church. Many Mexican farmers found themselves farming land owned by the Church and renting houses from the Church. On top of this, the Church had the audacity to demand a tithe.
The population had had enough. With its slogan of `Land and liberty’, the Mexican revolution began targeting large landowners to such a degree that an otherwise pious society took to killing its priests.
What is it that societies find so objectionable about a situation in which philanthropists accumulate too much wealth? A few objections come to mind.
4. Democracy and disempowerment
A natural way to put the worry is to think about the uneasy relationship between philanthropy and democracy discussed in Part 2 of this series. Although philanthropists provide badly needed public goods, they do so in a way that circumvents the process of democratic decisionmaking, as well as other processes of political decisionmaking in non-democratic societies.
For all that the recipients of philanthropy are genuinely grateful to receive public goods, they cannot help but wish that they had a voice in how these goods are allocated, how much public money will be allocated to public goods, and which goods will be funded.
The concern about democracy is intimately related to a concern about disempowerment. Over time, residents of Turkey and Mexico found themselves increasingly unlikely to own the land they farmed and lived on. The slow, steady philanthropic accumulation of wealth squeezed out opportunities for ordinary citizens to own property and other resources. This created a real sense that society had been mortgaged, and even if the landlord was benevolent, she was still a landlord, and her ownership of a large chunk of societal assets left ordinary citizens feeling powerless and unable to develop.
5. Unfair competition
In creating modern foundations, we have in a very real sense created an agent whose incentives and capabilities almost guarantee that it will outcompete ordinary citizens over the long-run for ownership of societal assets.
In many societies, foundations are exempt from taxes on income, property and capital gains. Donations to foundations are likewise tax exempt.
The wealth of foundations, unlike individual fortunes, cannot be broken up by inheritance taxes or the squabbling of heirs since foundations do not die.
Because foundations operate on a long time-horizon, they reap risk and liquidity premiums by investing in risky and illiquid assets that others are unwilling to hold. They can do this because, over a long time horizon, risk decreases and liquidity improves.
Although humans find ourselves strongly motivated to behave impatiently, foundations can be constrained by charter, tradition or governance to behave more patiently than almost any human will behave.
All of these advantages, put together, help to explain why foundations tend in the absence of disbursement requirements and other regulation to accumulate increasing shares of societal wealth. But we created foundations. We gave them these advantages. Why should we, as citizens with an interest in ownership of societal assets, charter foundations in a way that virtually guarantees they will outcompete us?
6. Democratic opinion-shopping
Patient philanthropy is outright illegal in most western democracies today. Societies have learned from history that the patient accumulation of philanthropic wealth must be limited. A variety of laws, including annual disbursement requirements, have been enacted to prevent patient philanthropists from accumulating too much wealth.
How, then, does the Patient Philanthropy Project at Founders Pledge intend to accumulate wealth over hundreds of years? The answer is simple. The fund was registered in England, one of the few western democracies that does not enforce a minimum disbursement requirement.
In Part 2, we discussed one type of democratic opinion-shopping by high-profile donors to effective altruism: tax-policy shopping. We saw that SBF moved FTX and associated companies into the Bahamas, a notorious tax haven, likely motivated by the willingness of the Bahamas to offer a lower tax rate than competing countries.
Commentators generally take a dim view of opinion-shopping when it comes to tax policy. If most democratic societies have decided that corporations should pay their fair share of government expenditures, it seems questionable at best for those corporations to relocate en masse to the few actors willing to cut them a break on what seems a wise and sensible tax policy.
For the same reason, I think we should take a dim view of democratic opinion-shopping when it comes to disbursement requirements and other ways of discouraging patient philanthropy. If a large number of democratic societies have decided that philanthropists should not be allowed to patiently accumulate large amounts of wealth over time, it seems questionable at best for those philanthropists to relocate to the few actors willing to cut them a break, and this appearance is not helped by our judgments of other actors who have chosen to relocate their financial operations to London in recent years.
7. Efficiency
In the corporate world, firms often become less efficient as they age. The economists Claudio Loderer and Urs Waelchli studied the performance of 10,930 listed firms from 1978 to 2004. They found a robust decline in performance among older firms:
Getting older is associated with lower profitability. Profit margins, return on assets, and Tobin’s Q ratios [market value / replacement cost] fall. This pattern holds across different time periods, for different measures of age, for different industry definitions, and for different firm samples. This regularity is robust to a battery of alternative estimation techniques and specifications.
Loderer and Waelchli, “Firm age and performance“
Why might firms become less efficient over time? Loderer and Waelchli consider two explanations. The first, which is increasingly well-liked by economists, is that older firms are less innovative. After a while, it becomes increasingly harder to teach an old dog new tricks.
The good news is that competitive market pressures make short work of uncompetitive firms. A company that stops innovating stops making money, and then it is taken to the cleaners and sold for scrap.
But what about an aging foundation? Now we have a problem. Recall the complaint from the legal scholar Richard Posner that opened Part 2 of this series:
A perpetual charitable foundation … competes neither in capital markets nor in product markets (in both respects differing from universities)… It is not even subject to benchmark competition‚ that is, evaluation by comparison with similar enterprises‚ except with regard to the percentage of its expenditures that go to administration (staff salaries and the like) rather than to donees.
Richard Posner, “Charitable foundations: Posner’s comment“.
As foundations age, they become less innovative and correspondingly less efficient. If they were corporations, they would find themselves quickly outcompeted by other providers of public goods and driven from the marketplace.
Only, there is no competition among philanthropic foundations. An aging foundation can operate indefinitely, no matter its efficiency, so long as it maintains sufficient operating capital. And that, as we saw, is an easy matter for a patient philanthropist: she can make a mint simply by buying an index of the stock market.
Now we arrive at a worry for patient philanthropy, for the indefinite maintenance (and growth) of philanthropic foundations seems destined to place an increasing share of society’s wealth in the hands of aging, and increasingly inefficient, foundations.
Surely there is a more efficient system for allocating public goods than this one.
8. Rent-seeking
Loderer and Waelchli suggest a second reason why aging firms become inefficient: they take up rent-seeking. That is to say, executives and shareholders become increasingly successful at extracting money from aging corporations without adding additional value in return.
Rent-seeking is not only a problem with aging corporations. It is also a problem with aging foundations. Return again to the case study of Ottoman waqfs. Scholars are nearly unanimous in their belief that waqfs were often governed by descendants of the original benefactor, who drew large salaries and social benefits from their position and generally behaved in a nepotistic fashion. For example:
Rampant nepotism is a related pattern to which the waqf contributed. Caretakers tended to appoint relatives as their replacements.
Timur Kuran, “Institutional roots of authoritarian rule in the Middle East: Political legacies of the Islamic waqf“.
A good example of rent-seeking behavior is the Hasseki Sultan waqf, which, readers will recall, grew from a single soup kitchen to possess a property portfolio including 26 villages. As the waqf grew in power and influence, it began disbursing goods to wealthy and powerful members of society as well as to family members of waqf officials. For example, a study by Oded Peri finds that by the late 18th century, the waqf provided a daily allowance of 48 loaves of bread to the Ottoman governor of Jerusalem and the same allowance to a local mercenary commander. Peri observes: “the waqf of Hasseki Sultan was no longer just another poor-relief institution, but also a special fund used for granting benefits to certain favourite people”.
While I do not want to allege that current behaviors by effective altruists are rent-seeking, I think we should be worried about the percentage of EA expenditures that are invested back into the movement in a call to pay higher salaries as well as in movement-building efforts. These are exactly the types of behaviors that, over time, can morph into rent-seeking, drawing money away from the provision of public goods and towards the provision of goods and services to administrators, employees, friends and contractors.
Perhaps one way to contextualize the worry about rent-seeking would be against calls for institutional reform and power sharing within effective altruism. At present, a good deal of power is wielded within effective altruism in a relatively non-transparent fashion by a small number of people. Without better institutional safeguards such as transparency and power-sharing, this is a recipe for rent-seeking over time. Over hundreds of years, rent-seeking is nearly inevitable without better governance (and perhaps even with better governance).
9. Reflections on patient philanthropy
In this post, we have discussed patient philanthropy, the slow accumulation of patient wealth over time. Although patient philanthropy is an initially attractive idea, we saw that when pushed to its limits, patient philanthropy raises a number of challenges:
- Patient philanthropy takes public goods allocation outside of democratic control, and disempowers citizens by making it harder for them to own societal assets.
- Patient philanthropists unfairly outcompete individuals by exploiting unintended features of their institutional setup.
- Patient philanthropy is outright illegal in many western democracies, and is sustained by a form of democratic opinion-shopping.
- Patient philanthropy places increasing shares of societal assets in aging and inefficient firms.
- Patient philanthropy creates substantial opportunities for rent-seeking on behalf of fund managers and those they favor.
None of this is meant to show that all forms of long-term philanthropy are bad, evil or to be prohibited. We saw in Part 2 of this series that one of the chief purposes of philanthropy within a democratic society is to take a long-term approach to the allocation of public goods, so it would be foolhardy to force philanthropists to operate on a very short time horizon.
But from the fact that societies have an interest in allowing some forms of long-term philanthropy, it does not follow that we have an interest in allowing philanthropists to accumulate sizable portions of societal wealth over many hundreds of years, or that doing so would be (as Trammell argues) hundreds of times better than disbursing philanthropic assets today.
As a society, we might want to consider a number of reforms in response to the challenges raised by patient philanthropy:
- Term limits: Taking a long-term view does not mean granting an unlimited lifespan to philanthropic foundations and the dead hands of their founders. We might consider mandatory term limits of 50 or 100 years on the lifespan of philanthropic foundations.
- Endowment limits: In order to prevent philanthropists from coming to own sizable portions of an entire country, we might impose legal limits on the maximum size of philanthropic endowments.
- Internationalization of regulations: Just as the world has recently taken steps to crack down on tax havens willing to provide a break from tax regulations, so too we should explore the possibility of cracking down on `philanthropic havens’ willing to allow philanthropists to evade disbursement requirements and other legal limits on philanthropic power.
- Increased oversight of expenditures: To prevent rent-seeking, regulators should exercise increased oversight over the beneficiaries of philanthropic expenditures to ensure that funds are being used for a genuinely public purpose.
None of this would mean the abolition of patient philanthropy or the dismantlement of the Patient Philanthropy Project. But these reforms might leave a significantly more moderate practice of patient philanthropy which, by virtue of its moderation, could no longer promise the outlandish returns that patient philanthropy initially offered.
What else might we do to regulate the practice of patient philanthropy? Or do the proposed reforms already go too far? Let me know what you think in the comments section below.
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