Business is business, charity is charity

Dan Price, Gravity Payments
Image Source: Gravity Payments
Dan Price, Gravity Payments

The man who tries to make his business a charity or his charity a business will end up out of business and needing charity.

That sounds like something Ben Franklin, Mark Twain, or Ralph Waldo Emerson might have said. They didn't, but maybe that's because none of them lived to see the story of Dan Price and Gravity Payments. Price became a cultural hero and media darling three months ago when he announced that he was slashing his annual pay in order to set a new minimum salary of $70,000 per year at his Seattle credit card processing firm. Price was hailed as a visionary and kind boss, the kind of person who could help reverse the trend of income inequality if enough of his fellow CEOs followed suit.

It didn't turn out that way. In fact, things have gone predictably south for Price and Gravity Payments ever since. And now, the situation has become so bad that Price has now been forced to rent out his own home to make ends meet. But what happened to Price is not a reason to mock him. It is, however, a very good real world teachable moment about economics, business and charity.

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By setting his minimum wage so high, Price wasn't valuing the economic contributions of all his workers on anything close to an accurate scale. He also wasn't rewarding his best workers with the most marketable talents a better wage than workers who were more ordinary. In short, Price was giving those less economically valuable workers charity at his own expense and at the expense of his better workers. A predictable revolt within the company ensued. Top employees left. Customers got nervous and some pulled their business. The bleeding still hasn't stopped. Mixing business with charity is a fool's errand that shortchanges both. It seems pretty easy to predict that soon, that $70,000 minimum salary will be just a memory and another well-meant, but broken promise.

The developing debacle at Gravity Payments is the negative example that proves the rule that free market capitalism is the best way to improve the economic fortunes of the most people. Charity is a good thing too, and it's necessary all too often. But it's not a permanent fix for poverty. Businesses can and should give charity, but not as part of their business transactions or compensation.

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On the flip side, charities often act too much like businesses. It's been more than 20 years since the United Way executive perks scandal rocked that organization, but it still has not been able to regain the prominence it once held in the charitable world. And we've all heard about the many charities who are infamous for spending almost as much, if not more, on their own executive salaries and administrative costs than they do on the people they're supposed to be helping. No one should be running a charity as if it were a for-profit business.

So the path that Gravity Payments and Dan Price took should be avoided not because people shouldn't be generous, but because being generous in the wrong way ends up discouraging further generosity. And one way that Gravity Payments failed was by essentially forcing all its employees into an unwanted added layer of collective charity. People may or may not want to help their fellow workers or their neighbors, but forcing them to do so breeds disenchantment, guts the spirit of charity in the short run, and the purpose of charity in the long run. In the end, it discourages even wiser forms of generosity and altruism.

Does any of this sound familiar? It should. This is exactly what happens on a grander scale in the welfare state. The more the welfare or the more we see relief payments a government forces its citizens to pay for, the more divisions and disenchantment it creates within that society. Suspicions of real and imagined favoritism emerge. Corruption follows. It also discourages the more permanent and better solutions for poverty that come from the free market. And finally, it makes the society less charitable overall. Just look at the socialist states of Europe, when the average person gives a pittance to charitable causes compared to Americans of all economic levels.

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Both charity and free market capitalism are noble goals. But confusing them or favoring one too much over another is a pathway to ruin. Dan Price is finding that out the hard way, and perhaps he will learn this vital lesson in time. It's probably too much wishful thinking to believe that anyone in government will learn this too.

Commentary by Jake Novak, supervising producer of "Power Lunch." Follow him on Twitter @jakejakeny.