It (Still) Takes a Nation: Why Private Charity Will Never Replace the Welfare State.

• Author: Hammond, Samuel P.
• Position: Exploring the Philanthropic Landscape - Report

The Apostle Paul identified charity as the highest theological virtue, above even faith. As he wrote in his first letter to the Corinthians (13:2), "Ifl should have all faith, so that I could remove mountains, and have not charity, I am nothing."

Yet in today's secular, postindustrial context, the role of charity seems to be in jeopardy. American charitable giving has been in a near-monotonic decline for more than a decade and dropped to a new low following the Great Recession. More ominously, as the broader economy has recovered, the probability of giving at the household level has not. (1) In labor economics, the phenomenon of prolonged unemployment following a recovery is known as hysteresis. Charitable giving, it seems, has experienced its own hysteresis, as if the recession reset expectations around a new status quo--one that we were likely headed for anyway but that the shock of the financial crisis suddenly pulled forward in time.

Meanwhile, the composition of the charitable sector has changed dramatically. The types of organizations that qualify as tax-exempt nonprofits, identified by the Internal Revenue Service's 501(c)(3) status, is surprisingly broad, ranging from places of worship to "educational organizations" such as think tanks. Thus, although the (c)(3) sector has grown at an impressive rate overall, between 2003 and 2013 the number of registered social welfare organizations and beneficent societies fell 31 and 37 percent respectively (National Center for Charitable Statistics 2018). Panel studies that track charitable giving by households show a similar trend, with the median gift to organizations in the "basic needs" category falling by about 28 percent between 2000 and 2014--a decline masked by stable or increased giving in other areas (Osili, Ottoni-Wilhelm, and Han 2015). Advocacy organizations, policy shops, and cultural centers have become the archetypal nonprofits, supplanting soup kitchens and religious congregations. Whether that mental association is fully justified, the Janus face of nonprofits relative to the layman's definition has no doubt contributed to the cynicism of an already tight-fisted public.

The first question to ask is whether any of this matters. After all, private charity's retreat has occurred against the backdrop of a century of unmistakable economic success. The poorest fifth of Americans are exponentially richer than the average worker in the poorhouse era. The decline of mutual-aid societies in the twentieth century, meanwhile, was caused less by regulation than by competition from vastly more efficient public and commercial forms of insurance (Harris 2018). And although America's welfare state developed with greater reluctance and resistance than its European counterparts, by some measures the accretion of public-transfer programs has all but eliminated deep poverty (Meyer and Sullivan 2009). It cannot be repeated enough: free markets and the modern welfare state have done more for material well-being and the promotion of economic security than was or ever will be possible by charity alone.

Unfortunately, although libertarian and classical liberal thinkers have grasped the revolutionary power of the market, they too often pine for a charity-based model of social welfare that is rooted, ironically, in the preindustrial age. What has been missing is a defense of the welfare state on solidly classical liberal grounds--a gap I attempted to fill in a previous article, "The Free-Market Welfare State (Hammond 2018). In this essay, I extend my analysis to the important and changing role of the nonprofit sector, beginning with a strong rejection of the romanticism of a bygone era of fraternal orders and charity-based poor relief. Robust systems of social insurance and a market economy are best understood as a package deal, sharing a common logic in the liberal concept of "a cooperative venture for mutual advantage" (Rawls [1971] 1999, 4)--a logic that, like the market itself, reflects the enormous benefits that can arise from impersonal cooperation (Heath 2006). Far from undermining social capital, the free-market welfare state has opened all new horizons for free association. In short, it (still) takes a nation to underwrite the economic security of a free and democratic society, but in a way that has ultimately expanded the power and importance of voluntary associations.

From Mutual Society to Mutual Nation

There's a popular narrative about the welfare state, and it goes something like this:

Prior to the growth of the welfare state in the twentieth century, social welfare was provided on a voluntary, community-led basis. Religious organizations and mutual-aid societies cared for the poor and insured one another through pooled resources, all while engendering virtues of trust and cooperation. This changed with the introduction of major entitlement programs, first with Franklin Roosevelt's New Deal and later under Lyndon Johnson's Great Society reforms. Suddenly, instead of turning to their neighbor for assistance, the poor could turn to the helping hand of big government. Today's poor may have fuller stomachs, but it has come at cost of rampant social isolation and an erosion of society's moral fabric.

Like all revisionist histories, this story contains grains of truth. Mutual-aid societies were a major part of American life in the nineteenth century, representing most working people's primary source of social insurance after family. As the historian David Beito (2003) has shown, more Americans belonged to mutual-aid societies at their peak than to any other voluntary association besides churches. And although welfare expansions such as the New Deal were not the sole cause of these societies' decline, they were the most definitive ones.

Left out of the usual narrative, however, is a full appreciation for the miserable inadequacy of the mutual aid and poor relief that came before government welfare. Consider poorhouses, which represented the housing of last resort for the indigent, elderly, and mentally ill throughout colonial America. Costly to run, the earliest poorhouses depended on charitable bequests and were usually maintained by churches or a member of the local community elected as the "Overseer of the Poor." Nonetheless, their conditions were wretched, and the working poor were often treated little better than indentured servants. Even as the stigma of living in a poorhouse increased, population growth and industrialization drove the growth of the poorhouse population well into the nineteenth century, around which time they became tax supported and regulated by newly formed State Boards of Charities. Reformers worked to pull the mentally ill into institutions and children into orphanages, until by the late nineteenth century many poorhouses resembled squalid nursing homes (Hansan 2011).

The truth about mutual-aid societies is even more complex. Their coverage tended to be limited only to those who could actively make contributions. And although national insurance programs may have been their death knell, this is a bit like beginning a memoir at the epilogue. In actuality, the downfall of mutual-aid societies began years earlier, starting with the emergence of the commercial insurance industry.

Mutual-aid societies have existed for well more than three hundred years, but modern actuarial analysis (the statistical study of risk) is a comparatively recent invention. Innovations in the science of actuarial analysis first began diffusing through society after 1693, when Edmond Halley constructed the first "life table" for calculating annuities based on age. Abraham de Moivre's essay "The Doctrine of Chances," published in 1738, is credited as discovering the normal distribudon, which Carl Friedrich Gauss greatly expounded on in the 1800s. As theory trickled down to practice, the Equitable Life Assurance Society was founded in 1762, with the first recorded use of the term actuary. The company exists to this day as Equitable Life, the world's oldest mutual insurer. Yet, as a profession, the modern commercial insurance industry wasn't truly born until much later, when the Institute of Actuaries in London, the oldest actuarial professional body in the world, opened its doors in 1848 (Lewin 2001). Among the requisite breakthroughs was the invention of commutation functions, a mathematical tool for converting the value of a pension payable in the future into an immediate lump sum. Although such functions continue to be used on a daily basis, their invention--that of an obscure British actuary named George Barrett--nearly went unpublished, until being released in an appendix to the second edition of The Doctrine of Life Annuities in 1813 (Gray 1862).

Contrast statistically sophisticated insurance schemes with the friendly societies of Britain and Europe. A descendant of the medieval guild system, friendly societies were voluntary associations of skilled workers who pooled their income for rudimentary forms of short-term disability and life insurance. The modest membership fee collected by friendly societies was traditionally a flat rate (what we would today call the premium), although rates varied from society to society. The size of the potential benefits (that is, the insurance claim or payout) was often unstated, doled out on the basis of good faith and case-by-case deliberation. In short, the earliest friendly societies were like proto-mutual insurance companies flying blind.

The emergence of commercial insurance in the nineteenth century changed everything. The knowledge of how to accurately price risk and adjust claims gave commercial insurers the competitive advantage of lower premiums. With competition came financial instability, and traditional friendly societies struggled to retain members. For example, according to a comprehensive survey of friendly societies in Oxfordshire, England, between 1750 and 1918, 29 percent of all societies whose...