How rich people make money matters more than how they give it away

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John Bogle didn't sign the Giving Pledge. He didn't have the money. (You need $1bn.) But Bogle did more for the world than most of those who signed.

Bogle, the founder of the investment giant Vanguard, died last week. His story is a reminder that how you make your money matters more than how you give it away.

Bogle the donor was generous but otherwise unremarkable.

Bogle the capitalist was extraordinary. By popularizing low-cost index funds and setting up Vanguard so that it was owned by its mutual-fund investors, Bogle enriched millions of American investors. Bogle, arguably, did more good than all but a few of the very biggest, smartest American philanthropists.

On Twitter, Elizabeth Warren saluted Bogle:

By creating low-fee index funds, Jack Bogle saved working Americans hundreds of billions of dollars that otherwise would have gone to Wall Street. A man after my own heart. RIP. https://t.co/t0820umJJ0

— Elizabeth Warren (@ewarren) January 17, 2019

A bit of background: Index funds do not try to outperform the market, which is all but impossible to do over the long run. Instead, they amass shares of all the companies in a given index — a group of big US companies, like the S&P500 Index, or broader collections of firms in indices that invest across the entire stock market, domestic or global. Because index funds aim merely to match the performance of markets as a whole, they don't require high-paid fund managers. Their fees, as a result, are far lower than those of actively-managed investments. Fees matter a lot.

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Instead of the Wall Street mantra that “greed is good,” Bogle’s watchword was “enough.” Getting your fair share of the market’s growth, he argued, should be enough. “Enough” also described his approach to executive compensation: People at Vanguard are well paid, but not by Wall Street standards. While Vanguard played no meaningful role in the socially-responsible investment movement, it is the epitome of a socially-responsible investment firm.

“John Bogle has changed a basic industry in the optimal direction,” Paul A. Samuelson, the Nobel laureate in economics, wrote in a foreword to Bogle on Mutual Funds, a 1973 classic. “Of very few this can be said.”

On MarketWatch, columnist Brett Arends estimated that Vanguard’s “low-cost index funds, and the imitators they have inspired, may have saved ordinary Main Street Americans a staggering $250 billion, or more, in mutual fund fees over the last forty years.” This estimate does not take account the billions more that were saved as expensive funds cut their fees to compete with Vanguard. Nor does it account for the multiplier effect of those savings: billions that were reinvested in the market (making people richer), spent on consumer goods (creating jobs and wealth) or given away.

Unlike the founders of Schwab or Fidelity, who amassed vast fortunes, Bogle never became a billionaire. His net worth has been estimated at about $80 million. He reportedly gave away half his income every year. In 2012, Bogle told Reuters:

I tend to give to those who have helped me along the road of life: Blair Academy, Princeton University, our church, and several hospitals that got me here in one piece. On the community side, I’ve always been a big supporter of the United Way. The best rule for philanthropy is to give until it hurts, as much as you can, because none of us can get through life all by ourselves.

A lovely sentiment, but he certainly could have been more thoughtful about his giving.

Or, as Dylan Matthews of Vox put it on Twitter:

His charity was such garbage. He gave half his salary every year to his boarding school and Princeton

— Dylan Matthews (@dylanmatt) January 19, 2019

But Bogle's philanthropy is trivial when compared to his impact as a businessman. Hie death led to a Twitter discussion about how the social good created by Bogle stacks up against the philanthropy of Gates, Zuckerberg, et al. Business writer Matthew Zeitlin (@MattZeitlin):

Another Bogle thought: Look at how much people admire and love him despite "only" being worth $80 million. Business titans are obsessed with legacy and yet few seem to realize that *actively amassing less* while still providing a good service is one of the best ways to do it.

Vox's Matthew Yglesias (@mattyglesias) :

Yeah, "ethical business practices + bad charity >>> the fashionable Silicon Valley concept of destroying the world with your business and then trying to do smart donations to make up for it

Vox's Dylan Matthews (@dylanmatt):

That seems wildly false! There's no plausible view of the world in which Bogle's net contribution was better than, say,  Gates

I’m pretty sure that I agree with Dylan, but Gates is the exception. He's the world’s biggest philanthropist and among the smartest. The Gates Foundation has given away about $45bn, most of it to alleviate suffering among the world's poorest people, and its endowment is worth more than $50bn. For its part, Microsoft has to be judged a net positive for the world, despite its monopolistic practices in the 1990s. Microsoft created three billionaires — Gates, the late Paul Allen and Steve Ballmer — and an estimated 10,000 millionaires, many of whom have become active, thoughtful philanthropists. (Jeff Raikes, for one.) Today, the company employs about 130,000 people. That’s quite a legacy.

But how does Bogle’s net contribution compare to other billionaire donors like Mark Zuckerberg, Michael Bloomberg, George Soros or the Waltons. Such comparisons are admittedly imperfect, as Alexander Berger of the Open Philanthropy Project noted on Twitter:

I never really know how to think about counterfactuals on this stuff — would indexing have happened w/o Bogle, windows/office software w/o Gates/Microsoft, whatever FB is without FB/Zuck. Hard for me to model clearly.

It’s especially hard to think about Facebook and Zuckerberg. It’s too soon to judge whether Facebook has been a net positive for the world, and Zuckerberg’s philanthropy is just getting going.

But what about Bogle vs. the Sackler family? That’s an easy call. The Sackler name is emblazoned on the walls of museums and universities, but it has become a stain. Read this eye-popping Twitter thread from Patrick Radden Keefe, or better, his New Yorker article, The Family That Built An Empire of Pain.

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And where on the continuum do we place folks like Herb Kelleher, the founder of low-fare Southwest Airlines, who died earlier this month? Like Bogle, Kelleher created and operated a revolutionary business, a low-cost air carrier that transformed an industry for the better. He saved his customers (as well as the customers of rival airlines) uncountable billions and, just as important, enabled them to go places they otherwise would not have gone. He built a remarkable corporate culture that put his workers first and created enormous value for shareholders as Southwest grew to become America’s biggest airline. Southwest employs 58,000 people, most of them unionized.

How many 21st-century philanthropists can top that?

Debates like these may appear silly but but they’re worth having for a couple of reasons. First, those of us who scrutinize philanthropy need to think about billionaire donors and their foundations in a holistic way. If, as it seems, the Sacklers built their wealth on the suffering of others, no amount of patronage can erase the harm they did. The Rockefeller Foundation can’t be held responsible for the ills of Standard Oil, but the foundation can be expected to do as much good as it can when investing its endowment. (It fails that test.) Indeed, most foundations have failed to learn the simple lesson that Bogle taught — that it’s folly try to beat the market with high-priced investments.Instead, they fritter away tax-advantaged money in pursuit of market-beating returns.

Second, we’re living at a moment when big philanthropy and big business are increasingly under attack — and yes, here I’m thinking of Anand Giradharadas’ Winners Take All, as well as Decolonizing Wealth by Edgar Villanueva. Their searing critiques gloss over the impact of smart philanthropists like Gates and, even more, the considerable good works of responsible capitalists like Bogle and Kelleher. Last year, Villanueva wrote in the Stanford Social Innovation Review:

Colonial dynamics are alive and kicking here in the 21st century, dividing the world into haves and have-nots…The system of capitalism, by its nature, uses wealth as a tool to divide, control, and exploit us.

Seriously? Tell that to the billions of people who have been lifted out of poverty in the last couple of decades by, er, the spread of capitalism. 2018, after all, was the best year in human history.

Yet the belief that capitalism is somehow a morally tainted enterprise seems to me to be widely if not universally shared in the social sector, particularly by younger people. This is lazy and misguided thinking. When it comes to philanthropy — defined, broadly, as the desire to promote the welfare of others — proud capitalists like John Bogle and Herb Kelleher have few peers.