(Interviewed by Louis James, Editor, International Speculator)

This interview was first published on November 4, 2009

Editor’s Note: In yesterday’s Weekend Edition, Casey Research founder Doug Casey explained that charities mostly exist in order to make the donor feel good.

Today, Doug says there’s one kind of charity he does support…

Louis James: Okay. So what happens when you run into literally starving orphan babies in Haiti, the way you did? Even if you allow wealth to accumulate, and society becomes 50 or 100 times wealthier, and that decreases poverty by 50 or 100 times – or maybe 1,000 times? There will still be some cases of people who, through genuinely no fault of their own, truly need a helping hand, and the consequences would be dire if they don’t get it. What would you advocate in those situations?

Doug: Well, in the first place, though I’m not a Christian, let me quote Jesus of Nazareth. He said, “The poor you will always have with you.” He had a different context in mind, but he was quite correct. That’s because in most cases, poverty is not a function of bad luck.

It can be, sometimes, of course. Perhaps if you’re born in a country with a brutal and repressive regime, or if you’re born with mental handicaps; there are all kinds of things that can happen. But generally, with a few such exceptions, poverty is simply a sign of bad habits. In a relatively free country, it’s a sign of an inability or unwillingness to save, which is to say, to produce more than you consume. It’s a sign of a lack of self-discipline. Sloth that afflicts those not willing to learn skills they can sell to other people. It can be a sign of having no self-respect, as among those who spend all their money on drugs and alcohol, which are debilitating, rather than strengthening.

In the vast majority of cases, those who suffer from poverty are not victims of anything other than their own bad habits.

L: Wow. Tough words.

Doug: It’s even worse than that. Think about it. Let’s say we’re looking at some place where there’s been a drought or some other serious natural disaster, and then organizations like the UN ship in thousands of tons of food. What happens when that food hits the local market?

L: Does it even get there? Doesn’t the local dictator usually take it and sell it in some other country where people can pay for it, and then stash the cash in a Swiss bank account?

Doug: Well, that’s the first thing that happens, of course. But even when it gets through to the intended recipients, such aid rarely helps them. In fact, it usually hurts them because, as I was saying, when all that free food hits the local market, it drives the price of food down so low the local farmers can’t produce profitably.

What happens when you drive the local farmers out of business? They stop planting, there’s no crop the next year, and the shortage of food becomes even worse. The very acts of these charities trying to help people in famine-stricken areas prolong the famines.

Now, I’m not saying that if you know someone who needs a helping hand, and you feel good about helping, which is different from feeling guilty about not helping, that you shouldn’t do it. It can be a good karma thing to do, and I do believe in karma, incidentally.

But when these things are institutionalized, they create distortions in the marketplace.

L: People may think it strange to hear you talking about markets in famine-stricken places or regions devastated by earthquakes, etc. But markets are everywhere. They are not physical places in New York and London, but are aspects of human psychology. They are patterns of human behavior created by people when they enter into voluntary transactions, as distinct from government action, which is always based on coercion. In today’s world, famine can still be caused by storms, drought, and other natural events. But it’s more often caused, and always aggravated, by distortions in the market: taxes, wars, idiotic regulation, runaway inflation, and the like.

Doug: And when a big charity intrudes on one of these weakened, distorted markets, it usually adds even more distortions, prolonging the problem.

Consider these charitable organizations going around the world treating diseases. The reason these countries have these terrible diseases that kill so many people is because they are economically undeveloped. Keeping people alive via extraordinary measures in such a place only results in more people competing for the same scarce resources. The answer to the problem is not to send in teams of doctors, so that you’ll have even more destitute people producing no wealth, but to free the local market so the people can become wealthy. The disease will go away as a consequence; this is the only permanent cure. What they are doing is the exact opposite of what they should be doing; they are making things worse.

L: Sounds pretty cold, Doug, to say, “Don’t send doctors…”

Doug: Well, don’t forget that a lot of people have supported the likes of Mugabe and deserve the economic ruin they are getting, and the diseases that are going to follow. Send doctors in if it makes you feel good, but it’s putting Band-Aids on smallpox. Don’t imagine that you’re actually helping solve the problem. People who do this kind of thing, I believe, do it because of feelings of guilt and shame they carry around inside. I understand them, but I don’t agree with them.

It does sound cold-blooded, and I’m sorry. I like kids and dogs and the same things most people like. But I’m not talking about whatever I or others might imagine is nice. I’m talking about the only real way to solve such a problem.

It’s disgusting to see hotshot yuppies self-righteously driving around the African bush in new Land Rovers, pretending they’re eliminating poverty. That’s where most of the money goes, in fact. High living and “administration.”

L: You didn’t let me finish. I was saying that it sounds cold-blooded, but who’s really more cold-blooded: The one who knowingly spends precious resources on measures they know won’t be effective and will lead to greater sorrow, or the one who has the courage to make the hard decision and reach for the real, long-term solution?

Doug: Yes. That’s the way I see it.

L: It occurs to me, reacting to the distinction you made earlier between individual charity and institutional charity, that perhaps it’s like religion. Whether we agree with their beliefs or not, it’s clear that many people derive value from those beliefs. But when religions become organizations and dogma sets in, they can get really destructive.

Doug: Well, as an individual, if I come across a person who I have reason to believe is worthy of my charity and my trust, I might act individually. But yes, when things get organized, they get bureaucratized. It’s just the natural course of things; it seems almost universal that as organizations get older and more structured, they become counterproductive to their intended purposes.

Charity is especially prone to this problem because of the phony ethical notions that now pervade Western society. It’s gotten worse over the last 100 years. People have come to believe that an instrument of coercion, the state, has to take care of them. Perversely, when the state engages in charity, which isn’t charity, because tax-supported giving is not voluntary, it discourages true charity. People who have money taken from them by the taxman have less of it to give to those they might know who genuinely need help.

L: The Tragedy of American Compassion. Marvin Olasky.

Doug: Great book. I think the Chinese are much more intelligent than Westerners in this regard. The only charity you find in most Oriental societies is organized by beneficial societies that seem less pervious to squandering. Peer pressure and moral approbation keep them in line, unlike governments, which exist primarily to serve themselves. And taxes tend to be a lot lower in the Orient, so people have more money to give, if that’s their inclination.

In fact, one of the horrible aspects of this issue, in the United States, is that large amounts of money are stolen from estates in the form of death taxes. The idea seems to be that the government will deploy wealth more wisely than the children of its creators. But this is ridiculous. It’s part of the whole ethical morass that charity and taxation are tied up in, in the U.S.

Suppose you have a Chinese and an American, of equal intelligence, work ethic, education, skills, etc., and an equal amount of starting capital. The American who starts with a dollar might end up with a million. But the Chinese guy in the same circumstances will end up with 50 million. All because of the difference in taxes and regulations.

But it’s worse than that, because whatever amount of money the American is going to leave to his kids, half of it is going to disappear down the tax rat hole, while 100% of the money the Oriental guy leaves will go exactly where he wants it to go.

That has major implications for wealth accumulation. It’s another reason for the diversification of political risk we keep reminding people is so important.

But sadly, even if an American ends up with $100 million, odds are he won’t leave the bulk of it intact as an effective capital pool, to be expanded upon by his chosen heir. He’ll give it to some charity that will be run for the benefit of its board of directors. They get to be big shots with other people’s money, corrupting both themselves and the intended recipients.

L: So, the bottom line is that if you had a magic wand and could abolish all charitable institutions with a wave of it, you’d do it. And you would not replace them with anything. You’d use the wand to reduce taxes and regulations everywhere, to allow for more wealth creation. And for those few desperate cases clinging to the bottom rungs of the social ladder, you think individual conscience would suffice.

Doug: Exactly. To me, charity should be strictly an individual, one-on-one thing. That’s the only way you can know that it can really help, and even then it doesn’t always work. Once you have to hire somebody to run a charitable organization and have secretaries and assistant vice-presidents in charge of light bulb changing, it’s just another bureaucracy headed for disaster, dissipating wealth as it goes, and doing more harm than good even among the intended recipients of the charity.

L: I don’t see a lot of immediate investment implications here, but there’s certainly a lot of food for thought for those intent on wealth accumulation.

Doug: Let’s just say that your moral obligation to the rest of humanity, insofar as you have such an obligation, is to keep your capital intact. First, that means to deny it to the state, which will very likely use it in a destructive way. Second, to direct it to those who will use it to produce more – not to unproductive consumers. Third, to take some personal responsibility, and do it yourself – don’t devolve it upon some unknown board of worthies who will have their own ideas about what to do with your money.

L: Got it. Thanks.

Doug: You’re welcome. Till next week.

Doug Casey is a multimillionaire speculator and the founder of Casey Research. He literally wrote the book on profiting during economic turmoil. Doug’s book, Crisis Investing, spent multiple weeks as number one on the New York Times bestsellers list and was the best-selling financial book of 1980. Doug has been a regular guest on national television, including spots on CNN, Merv Griffin, Charlie Rose, Regis Philbin, Phil Donahue, and NBC News.

Doug and his team of analysts write The Casey Report, one of the world’s most respected investment advisories. Each month, The Casey Report provides specific, actionable ideas to help subscribers make money in stocks, bonds, currencies, real estate, and commodities. You can try out The Casey Report risk-free by clicking here.