This article was posted on Wednesday, Mar 01, 2023

SchumpeterThe oft-quoted Joseph Schumpeter wrote the following defense of capitalism in his book “Capitalism, Socialism, and Democracy” (1942):

“There is no doubt that things available to the modern workman that Louis XIV himself would have delighted to have yet was unable to have – modern dentistry, for instance. On the whole, however, a budget on that level had little that really mattered to gain from capitalist achievement. Even speed of traveling may be assumed to have been a minor consideration for so very dignified as gentlemen.

Electric lighting is no great boon to anyone who has money enough to buy a sufficient number of candles and to pay servants to attend to them. It is the cheap cloth, the cheap cotton and rayon fabrics, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elizabeth [Note: presumed to refer to Elizabeth I, (1558-1306)] owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort”.

Basically, Schumpeter argues that capitalism does not necessarily advantage the rich, for they already have access to the best their society provides in whatever abundance necessary. The benefits of capitalism are received by the poor, who yesterday did not have affordable access to silk stockings, but now can buy all they need. It is the lives of the poor that are enhanced by capitalism.

Capitalists and Legacies

Capitalists and their legacies come in all sizes. An example of a big-time capitalist would be Andrew Carnegie, who made his money by adapting the Bessemer process to the manufacture of steel. That eventually made him, at the time, one of the richest men in the world. He used a not insignificant portion of that wealth to fund over 2,500 public libraries, mostly in America but also in Europe, South Africa, Australia, and New Zealand. The awards began in 1880, with the last Carnegie Library grant in the US issued in 1919.

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Public libraries have been functionally replaced by computerized search engines. But, in their time, they provided the means for a motivated individual to acquire knowledge not otherwise accessible to them. In that way public libraries improved not only the individual but also society at large.

We have, in the current series, discussed several capitalists whose charitable projects were needed, but not included in government budgets. In that way, individual philanthropy fills the space between what is and what might be. Interestingly, it is not necessary to be Carnegie-rich to make a difference. Biddy Mason donated her nursing / midwife services when her patient was unable to pay.  

“Biddy” Mason Legacy: Social Welfare

Biddy Mason was (informally) trained as a nurse and midwife, earning $2.50 a day. It could have been more, but she often donated her services to people unable to pay. She lived frugally, but it still took her ten years to save the $250 required to purchase two contiguous lots in Los Angeles. The lots were fronting Spring Street, between Third and Fourth Streets. That was, at the time, on the outskirts of the city, a little over one block northwest of what is now Pershing Square.

She became, in 1866, one of the first African-American women to own property in Los Angeles. On one lot she eventually built a clapboard house that became her home. The other lot was initially turned into a vegetable garden, and later became the site for the first of Biddy’s rental properties.

Over the next several years she bought additional nearby lots in Los Angeles. As the town developed, most of her early investments became prime urban real estate. They formed the basis for her developing wealth.

Now less occupied in nursing / midwifery, she turned her attention from individual charity to institutional philanthropy. The larger scope increased the reach of her charity. In 1872 Biddy and her son-in-law, Charles Owens, founded the city’s first black church, the First African Methodist Episcopal Church. She donated the land on 8th St. where the original FAME church of Los Angeles was built. At her death in 1891 she left an estate of around $300,000 (today-money: $8,700,000) bequeathed to a variety of humanitarian organizations.

To place this into perspective, Biddy Mason illustrates what a motivated philanthropist can do with relatively little money. Even at her death she had less than $9 million, about what a nice 20 to 30 unit apartment building might go for today. This compares with Edward Doheny, who died with $1.8 billion, or J.P. Getty who passed away with something north of $22 billion, after gifting $600,000,000 to his eponymous museum. (Estimates in now-money).

Edward L. Doheny Legacy: Ophthalmology

Edward Doheny was young and indigent, but he was a hard worker and certainly no nincompoop. He completed high school at fifteen, at a time when graduating from high school was an impressive achievement. In 1871, diploma in hand, he presented himself to the U.S. Geological Survey and was immediately hired. Three years later he left government work to try his hand at prospecting in the Black Hills of South Dakota. That was Sioux land. White men were not supposed to be there. The Sioux said so, and so did the U.S. Government in the 1851 Treaty of Laramie. But gold was discovered in 1868 and, as everybody knows, gold trumps treaties.

Doheny had no luck at gold mining. He left for Prescott, Arizona, where the 1880 census listed him as a (house) painter. The next stop was Kingston, New Mexico Territory, where he interested himself in silver mining. He did quite well leasing and sometimes developing prospective silver sites. In 1891 he left his wife (Carrie) and their daughter (Eileen) in New Mexico and moved to Los Angeles where he heard prospects were favorable. The attraction was flipping land. Los Angeles, then as now, was a dry land, made habitable by water delivered by a network of ditches. It was not too difficult to buy acreage just beyond the irrigation sluices, subdivide it into housing sites, and flip it just as the water ditches were arriving.

Then the land boom collapsed, as land booms do, and Doheny went to San Diego County as a prospector. He was unsuccessful, and by 1892 he was (again) so poor that he could not afford to pay for his boarding room.

But soon afterwards Doheny returned to Los Angeles and became interested in the asphalt seeps at the La Brea Tar Pits. Reflecting on lessons from his gold and silver mining days, he concluded there might be a living to be made from oil. He arranged a $400 loan from a former business partner for explorative purposes.

It had struck him that the big silver mine owners in the small towns of New Mexico did not do their own digging. They hired people to do that. And he was successful in New Mexico. Taking a page from those days, Doheny bought oil leases (rights) but employed other people to work them. Doheny poured his profits back into additional leases and the growth of his business which, several times in his career, approached the exponential.

Edward Doheny died in 1935, leaving an estate of $85 million in then-money ($1,815,000,000 in now-money). In 1944 his widow, Carrie Estelle Doheny, became blind in her left eye. Then she began to lose sight in her right eye. There was nothing to be done for her, but her loss of vision inspired her to underwrite the Estelle Doheny Eye Foundation (1947). The foundation’s purpose was to support the “conservation, improvement, and restoration” of human eyesight.

Now called the Doheny Eye Institute, it maintains offices at the former Avery Dennison campus (150 N. Orange Grove Bl., Pasadena) which it purchased in 2017 for $50,000,000 (Pasadena Star News, November 20, 2017).

P. Getty Legacy: Arts & Crafts

The story is that J.P. Getty had a long simmering affair with ancient sculptures but had only a minor collection. It wasn’t due to a lack of product. Amongst dealers the market for antiquities was robust, but Getty was not a player because he declined to pay gallery commissions.

There was a separate market amongst the cognoscenti, where pieces were exchanged between collectors, often with added boot. Prices at times reached the “I’ll trade you two $400,000 cats for your one $800,000 dog” level that Getty thought not quite business-like.

But then the 1929 Great Depression struck. Stocks and bonds imploded. There were two major drivers for the collapsing prices: (i) Nearly everybody was underwater: they’d paid more for the asset than they could sell it for. And (ii) much of their paper wealth was burdened by margin loans. These are compounding factors.

Consider: Investor is at a cocktail party and overhears some Barker announce to the surrounding group that XYZ stock is going through the roof! Just last month it was selling at $3, and today it closed at $90! Now is the last minute to get in on the ground floor!

During the question period, Investor tells Barker that he’d love to get on the train, but he’s “fully invested”. Barker responds, “No problem. We’ll give you a margin loan secured by your portfolio. Then we’ll put that money into XYZ. Problem solved!”

And soon thereafter the market cratered. Investor needed money but couldn’t sell his stocks or bonds because he no longer owned them. He hadn’t made a margin call and the Broker sold the stocks / bonds used to securitize the margin loan. Investor no longer received the interest and dividends that supported his family. He had no choice but to market his collectables at whatever price he could get. Other collectors in Investor’s position were experiencing the same market conditions. The value of collectables consequently plummeted as well.

That was J.P. Getty’s time to shine. He was a magnificent negotiator, especially so when the counter-party had no viable options. And that was why the Getty Collection began in the 1930’s, and not ten or 20 years earlier.   More, later.                                                                       

Note to the Reader:  This article is largely sourced from Wikipedia, expanded where appropriate by the following:[email protected]&success=true&code=success&bc_nonce=063qnqxudib7ba5qqaglhs&cid=gen_sign_in&cid2=gen_login_refresh

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