Bill Gates' Misguided Capitalism

This article is part of a series on "creative capitalism," a term used by Bill Gates to describe how market incentives can be used to better aid the world's poor. The Huffington Post is reprinting a number of these articles in collaboration with, an Internet publishing experiment run by Michael Kinsley and Conor Clarke. After several weeks, the articles -- along with the reader comments posted on this site and others -- will be edited into a book, to be published by Simon and Schuster in the fall of 2008. To read Gates' original speech on creative capitalism click here. To read all the contributions to this series click here. If you have questions or suggestions for this series please email Conor Clarke at conorjclarke [at] gmail [dot] com.

Bill Gates' speech on creative capitalism was misguided in two important ways -- it made a false accusation about traditional capitalism, and it made extravagant claims for corporate philanthropy (AKA "creative capitalism").

The false accusation was that traditional capitalism fails to help the poor. It is certainly true that firms have much more incentive to meet the needs of rich people with money than to meet the needs of poor people without money. What Mr. Gates forgot was that as firms expand their production to meet more of rich people's needs, they hire more unskilled labor to do so -- driving up the incomes of poor people. As firms invest in machines to increase production for the rich market, they drive up the productive power of workers -- further increasing wages of poor people. And lastly, firms have an incentive to continually search for new technologies that make both machines and workers more productive, once again -- you guessed it -- driving up the wages of poor people. Think of the information revolution that makes today's factories more efficient, i.e. makes both machines and workers more productive. Or if you prefer historical examples, think of the assembly line -- a new technology that simply rearranged machines and workers in a way that made them all more productive. Traditional capitalist forces such as these explain why unskilled wages trend steadily upward and the poverty rate (measured at a fixed poverty line in real terms) has declined drastically in American economic history. Such forces also largely explain why the global poverty rate has fallen in half over the last three decades.

I am sympathetic to Gates' impatience that the fall in poverty is not fast enough and that global inequities are still too large. If I knew of a system that did better than traditional capitalism (I don't), I would be happy to join the advocacy campaign for such a system.

Bill Gates' creative capitalism is NOT such a system. I am sympathetic to the case for corporate philanthropy, which I think Ed Glaeser articulates well. But Mr. Gates makes two implicit claims that don't withstand scrutiny. The first is that corporate philanthropy can be on a large enough scale to make a large dent in world poverty. Second is that corporate philanthropy is an effective and efficient vehicle for meeting the needs of poor people.

On the first, American corporate philanthropy to the developing world is $5.5 billion (source: Index of Global Philanthropy 2008, Hudson Institute -- figure refers to 2006). This compares to production for the market in the United States of $13.4 trillion (US GDP, also as of 2006). Gates' "recognition" reward for corporate philanthropy is something, but the current outcomes suggest the "recognition" objective is so far satisfied with relatively tiny amounts of corporate giving compared to producing for markets. I don't see anything on the horizon that would drastically change that -- not even an eloquent speech by Bill Gates. Moral exhortation has a very limited effect on most people's behavior, much as we would wish it otherwise. For an example from another area, I think $4 gas prices are a more powerful device to discourage driving in giant SUVs that barely make it from one gas station to the next than telling people to care about their "carbon footprint."

And even if corporate philanthropy were somehow drastically increased, would it be effective in meeting the needs of the poor? Philanthropy faces the same problem that has bedeviled foreign aid -- to the extent "recognition" does matter a little, you get the recognition for the gift itself, not for the gift's effect on the poor (which comes much later and is largely unseen by those who grant "recognition"). This is why all the talk in the official aid discussion is about how much money is spent, not the effects of the money spent.

You have to work very hard to figure out what the poor want and need, and how you actually implement the technology (including incentives for the implementers) to meet those needs under local conditions. Corporate philanthropists would do well to draw on the entrepreneurial skills that made them into a successful corporation to solve such difficult problems. Unfortunately, my experience so far with CSR (corporate social responsibility) departments is that they are too often filled with wooly-thinking people hired especially for CSR -- not anyone with entrepreneurial experience from the corporation itself. I guess this fits the prediction of the theory that CSR departments have more incentive to do PR (that's how you get Mr. Gates' "recognition") than to achieve results for the poor.

Why does all of this matter? Political debate about which system to favor is still ongoing in many places in the world -- both rich and poor. Mr. Gates' speech attacks the system that has historically done the most to alleviate poverty -- traditional capitalism -- in favor of an untried and implausible alternative -- an illusory Third Way that mixes profits and altruism. The effect of such advocacy may be to increase job opportunities for aid bureaucrats -- now they can work for CSR as well as for the World Bank! -- but to decrease job opportunities for poor workers as capitalism retreats under political attack.