The incentives of the fiat system have broken charitable giving, but Bitcoin offers a chance to make real impact without virtue signaling.

This is an opinion editorial by Jimmy Song, a Bitcoin developer, educator and entrepreneur and programmer with over 20 years of experience.

Everybody loves charities. They help the poor. They provide for the needy. They reduce suffering. They make society better… right?

Billions of dollars go toward all sorts of charities every year and most people view charities as a clear win for society. Yet, like getting your genomes analyzed, if you dig a little deeper, you might not like what you find.

The idea of charity is a deeply Christian notion. Charity is love for your neighbor, the idea that you provide for them when they are in need. Some of the first hospitals, for example, were Christian charity institutions. The principle that the poor and needy should be treated with love and dignity was an alien notion to most philosophies, from those developed by the Romans to those of Nietzsche. Charity is one of the markers of Western civilization.

Unfortunately, charity has been debased. As a Christian virtue, charity is a much greater notion of love than just almsgiving. Sadly, the word “charity” has changed to mean pretty much only almsgiving as a result of fiat money. Instead of meaning helping the poor and vulnerable neighbor when they are in need, it now means giving money to some central organization to help people on your behalf. Charity has transitioned from a concrete action helping someone to a monetary gift to a central party. Charity has devolved like an absentee dad making up for a lack of relationship by buying his kids toys.

Unsurprisingly, fiat money has contributed greatly to this debasement.

Charity In The Past

Charity used to be very local. You had a relationship with your neighbor and helping them out was a part of the communal experience. There was already a web of relationships that connected you and charity was received with gratitude. The giver and the recipient both knew that the help wasn’t something you could take for granted. Abusing charity had harsh consequences. Taking advantage of charity would be breaking the very relationships that provided that charity and would damage more relationships besides. Abusing charity would be like sawing off the branch you’re standing on and few people would be foolish enough to do so.

Nowadays, relationships are treated as disposable. People don’t have an incentive to act well because ultimately, the bad reputation that it should engender doesn’t really come back to bite them. Most people are dependent on their employers or governments, so as long as those relationships are good, they’re fine letting other relationships go.

Thus, relationship dynamics are much more high time preference. A relationship with a person is very different than a relationship with an organization. Organizations, quite frankly, are much easier to fool and they rely on bureaucratic procedures to determine your neediness. The centralization of our relationships around large organizations has made abuse of charity much easier.

As a result, charity has become less effective and mostly economic. What used to be fulfillment of all sorts of human needs has been reduced to monetary help. Fiat mentality is thinking that money can solve any and all problems, and charities are infected.

As with all virtues, practicing real charity is hard. It not only requires sacrifice on the part of the giver, but also their effort, whether it’s time or relationship capital that’s spent, or your personal skills that are used to help. What charitable organizations have done is to outsource all of that in an economic transaction with themselves in the middle.

The fiat mentality that money can solve everything has placed these large organizations in the middle and unsurprisingly, the money often isn’t used very effectively, nor in a way that actually helps.

Cantillonaire Almsgiving

Fiat money has made charity pretty impersonal. Giant organizations sit in the middle of the almsgiving. These organizations are very convenient for the would-be altruist. The hard work of virtue is outsourced to someone else. Love for a neighbor can be bought for some money.

The money, if earned under a sound money economy, likely produced a lot of goods and services. In a fiat money economy, however, that money may have been earned through Cantillon effects, that is, through theft. The reputations of Cantillon winners are generally pretty bad. Think about the typical investment banker and what sort of reputation they have. Many people want to be investment bankers, it’s true, but they’re not exactly beloved.

Rent seekers don’t really add anything to society and that’s why their reputations are terrible. They need some level of reputation repair and charity gives them a convenient way to do that. They can buy a good reputation through charity.

This is a tried and true strategy for many billionaires. By focusing on “charity,” they get a tremendous reputational boost and many of their fiat abuses are put on the back burner. The incentives of fiat money are such that it encourages almsgiving, especially as a way to whitewash your fiat abuses.

At this point, you might be thinking, isn’t that good? Don’t we want charities to be funded well? Don’t we want good things that a charity provides? Allow me to disabuse you of that notion.

Charities Have Terrible Incentives

Certainly, the goals of most charities are noble. They want to end world hunger and reduce pollution and cure diseases and promote the arts. Their goals are noble, but do they actually achieve them?

The charities would have you believe that they do. Unfortunately, the incentives are such that they only tell you about their successes. After all, if they told you that they wasted millions of dollars on a scheme that didn’t work, would you donate to them? Yet there must be lots of failures. If charities were all successes, wouldn’t all of their noble goals be achieved already given the enormous amounts of funding? Wouldn’t we have world peace, lifted billions out of poverty and have cured all kinds of diseases?

This should sound familiar. These same incentives exist in a decidedly different area: government. It’s in their interest to tout only their successes. It’s in their interest to make it seem like they’re not wasting money, even if they are. We know that government wastes a tremendous amount of money. The market incentives aren’t there and funding comes through political means. As a result, we get a lot of rent seeking.

Similarly, charities tend to also have a lot of rent seeking. In Barack Obama’s autobiography, “Dreams From My Father,” he talks about his experience as a community organizer. He was frustrated at how many of the charities that were supposed to help these communities were staffed by people who didn’t do anything. This behavior was so common that whenever he was associated with a charity, people in these neighborhoods would hit him up for jobs at that charity. In other words, charities are known to be a haven for rent seeking.

Charities have a structural problem and unfortunately good intentions, or noble goals, are not enough. Too many people trust charities to do the right thing and that trust unfortunately gets abused.

Very Little Verification

People like charity. It’s the original virtue signaling. Donate some money to some cause and it makes you look altruistic. I say this somewhat cynically, because so many of the people who donate to charity don’t actually follow up and verify whether the money is being spent well. If people really cared about the results, most of their effort would be on the verification aspect of these charitable endeavors.

Sadly, the only verification you receive are from the charities themselves and of course they have a huge incentive to make it seem as though they’re doing massive good. Sadly, the accountability is lacking in most charities. If we really cared about the good they were doing, then each charity would be much more scrutinized.

But, as we saw with fiat monetary systems, there’s much less scrutiny in general. VC due diligence is a complete joke. We’ve seen this over and over again, whether it be WeWork, Theranos or FTX. The money isn’t real anyway, so the more important job for a VC is to get in on investments that everyone else is getting into and dump. They give lip service, but don’t really care all that much about dull things like profit and loss. Sound money systems have much more scrutiny because there’s no endless spigot of money coming in.

And indeed, this pattern of much less scrutiny extends to charities. In a sound-money economy, charities are deeply scrutinized for actual good that’s done because the money is scarce. There’s more verification and less trust. In a fiat money economy, there’s way more money, so there’s more dependence on trust.

A charity is, in some sense, an investment. The investment is not for your own profit, obviously, but for the good of civilization. And those need to have at least as much accountability as normal investments. Instead, most people outsource that verification to others, often the charity itself. Do you honestly expect someone taking your money to tell you about how they spent it badly?

The Politicization Of Charity

One of the reasons why charity has become so political and rent seeking is because of the special player in the fiat money economy: the money printer. Charities don’t just get money from rich people, they often get money from government coffers.

Since 2018, San Francisco has given over $1 billion in grants to nonprofits to fight homelessness. That’s a single issue in a single city. I will note with prejudice that the homelessness problem in San Francisco since 2018 has gotten much worse, not better. Would you stick with a workout regimen if it made you weaker? What are all these nonprofits doing, anyway?

As you might expect with fiat money, the charities that survive are the ones that are connected politically. Outcomes are secondary to getting access to government coffers. Further, government funding of these charities serves as an informal verification system to donors that can’t be bothered.

Charities are perceived to be not driven by money. Yet if you look at their organizational structure, what becomes very clear is that money is at the center of everything they do. Instead of earning money through useful goods and services provided to the market, they go straight to donors like city governments to provide them with money. They sound noble, forsaking the dirty game of capitalism, but in its place is a dirtier game of playing politics to get the money they need to operate.

Further, because these charities aren’t dependent on outcomes or markets, the people that are in these organizations generally aren’t very good with money. Which is to say, that they’re not good at achieving the goals of the charity or making things more efficient. Their specialization is politics, marketing and publicity. Many are very good at throwing $20,000-per-person parties to raise money, but not so good at actually building wells. A lot of money going into charities gets wasted.

Because of fiat money, charities tend to leverage political skills rather than economic ones. They’re good at getting the high esteem of others and being viewed a certain way. They are in a sense a market good. The donors get a status boost for their donation. Charities survive despite their ineffectiveness, because of their political positioning.

So, What Now?

My view of charities is a bit depressing. I’ve just told you that many charities run on trading money for virtue signaling. How can we turn this around? Should charities even exist? Can we prevent bad organizations from taking advantage of our desire to virtue signal?

There is hope. There is a good way to do charity and, given that I expect many of you reading this to be in positions to give a lot of money away in the future, I have some thoughts.

First, verify. The sad reality of today’s charitable giving is that there’s too little verification and way too much trust. Giving away money for the greater good is not easy. I daresay that it’s often harder than earning it. Fiat money created this culture of trusting the slick salesman instead of verifying things for yourself. Much like with our money, we need to verify the charities we give to. Your money isn’t enough, your effort is required to give effectively.

The easiest way to verify is to have a close relationship with the person you’re giving your money to. This doesn’t mean that you’re in the same country club as the president of the non-profit, but doing some due diligence on the actual people that the charity is helping. Humans are built for relationships and that should be at the center of charity, not the money. The money is supposed to be secondary to the real virtue of charity, which is loving others.

Another possibility is to cut out the middleman and reduce the politicization of charitable giving. The giant charitable organization makes the monetary giving very easy, but in many other ways adds a lot of cost. By cutting out the middleman, we reduce the possibility of rent-seeking.

Middlemen are less necessary than ever. Giving direct contributions to the people that need it is much easier with Bitcoin. Verification, again, is difficult without some real relationship. Thus, if you really care about charity, go and make some relationships with the people that you want to help. Instead of waxing poetically about some oppressed group somewhere, go become friends with members of that group. I’m not saying this will be easy, but actually having a relationship with the people you’re helping will go a long way toward verification. Incidentally, this is one of the many reasons I really like going to the Oslo Freedom Forum. You can meet and interact with the people that need the help.

Second, look at the incentives. Charities like to think that they’re above economic incentives, but that’s not the case. Who’s in charge and how can you be sure that the money is going to the right place and done so in a way that’s efficient? If the charity pays more than the market rate for some good, that’s going to have second- and third-order effects. For example, many local clothing makers in developing countries go out of business when a charity gives clothes away for free. Yes, it feels good to help people get clothed, but you’re also stifling entrepreneurship in the region. You may be causing more harm than good. Make the calculation yourself instead of outsourcing it to the charity.

Third, beware of your own motivations. There are numerous altcoins which use charities as a way to whitewash the fraud they’re engaged in. They virtue signal because what they’re doing is so clearly scammy. This is so prevalent, in fact, that I see it as a horrible signal. If you feel the need to whitewash your gains through charity, those gains are likely ill gotten.

In the same way, we often give to charity as a way to boost our social standing, ease our conscience or to feel good about ourselves. Our motivation matters because it’s going to affect how much we verify. Give without telling other people that you’re giving. And give to people who you already know. If you don’t know anyone in need, go and make more friends outside of your bubble. Having the right motivation isn’t a cure-all, but it certainly helps you to put your money in the right place.

Bitcoin Fixes This

Thankfully, charity is strengthened by Bitcoin. Fiat money makes trusting other people to do the right thing the norm and of course, that trust gets abused. With Bitcoin, we can cut out the middleman and have direct relationships with the people we want to help.

Fiat money has made charity much shallower. Charity shouldn’t end with a donation, it should continue until the actual people that it’s supposed to help are actually helped. As such, we need a much deeper understanding of what helping the poor and vulnerable is. In that sense, charity demands not just money but also our time, effort and energy.

Fiat charity has been debased through fiat money. Exercising real charity is much harder than the current fiat version, which is outsourcing virtue to some monolithic organization.

Giving money away in an effective way is very hard. It’s as hard or more difficult than earning money from the marketplace. The same level of rigor needs to be applied to giving as earning, otherwise, you’re just going to enable a bunch of rent seekers.

Verify, don’t trust. Verify the organization, yourself and the people that you’re helping. Charity requires more from you and anything less may very well be paving a road to hell.

This is a guest post by Jimmy Song. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.