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 creativecapitalismblog.com, 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.
In the past several decades, economists have analyzed the competition from companies motivated solely by the desire for profits against companies truly motivated in part by other considerations. These other goals include altruism toward consumers, discrimination against minority employees, and a desire to help the environment. The main message from this analysis is that companies that forego some profits to pursue other goals have trouble competing against profit-maximizing firms. An example is the competition between firms that hire workers solely on the basis of their productivity and cost, and companies that give up profits to avoid hiring African-Americans or other minorities because they are prejudiced against these workers. Since firms only interested in profits will hire minority workers when that is profitable, and prejudiced firms will not, discriminating firms will be under a competitive disadvantage (for the details of the analysis, see my The Economics of Discrimination, 2nd Ed.,1973).
Companies that combine the profit motive with environmental and other concerns can thrive in a competitive environment only if they are able to attract employees and customers who also value these other corporate goals. Then the added cost of pursuing non-profit goals would be partially, if not entirely, offset by having customers who pay more for their products, such as fair-traded coffees. Or these companies may be able to attract high level employees relatively cheaply because the employees are excited by the prospects of spending some of their working time in helping others, perhaps by developing vaccines that can treat diseases common in poor countries. These appear to be the types of companies that Bill Gates wants at the forefront of his "creative capitalism" since he has encouraged companies to pursue recognition as well as profits.
How successful can this form of capitalism be? Gates quotes with approval the opening discussion in Adam Smith's outstanding 1759 book The Theory of Moral Sentiments on the importance of altruism in human motivation. While this book does deal with motives like concern for others, and the desire for recognition and acclaim, Smith was skeptical not about the strength of altruism, but about its scope or reach. For example, he uses an example in this book that is highly relevant to the present and to Gates' quest. He asks "how a man of humanity in Europe"... would respond to hearing "that the great empire of China... was suddenly swallowed up by an earthquake..." His answer was that "If he [this man] was to lose his little finger tomorrow, he would not sleep tonight; but, provided he never saw them [i.e, the people of China], he would snore with the most profound security over the ruin of a hundred million of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him than this paltry misfortune of his own" (Part III, Chapter 3).
Globalization has brought the situations in China, India, Africa, and other poor parts of the world much closer to the concerns of men and women in rich countries than they could ever have been in Smith's time. Still, essentially for the reasons given by Smith, it would be quite difficult to get many companies in richer countries to be highly motivated by a desire to find cures for diseases that are not profitable because they only afflict persons living in Africa and other poor countries, individuals who do not earn enough to pay much for the cures. It would not be any easier to get companies to spend significant resources to help lower carbon emissions that reduce global warming, unless these expenditures were forced by governments, or compensated by public or private sources.
My great teacher and close friend, the late Milton Friedman, took a well-known negative position on corporate responsibility. This is also the position taken by Richard Posner. Unlike these distinguished individuals I do not see anything wrong in Gates, Buffett, and others encouraging corporations to be more concerned with goals like distinction along with an interest in making profits. The real test is how viable such motives are in a competitive market environment where the competition includes companies motivated only by profits.
For the reasons I gave earlier, it is very difficult for companies to pursue other goals than profits when they face tough competition, and when the behavior of their competitors is driven solely by profits. A monopolist, on the other hand, can pursue other goals and forfeit profits, even when stockholders object, although private equity companies or corporate raiders may try to replace the management team with their own team that is motivated solely by profit considerations.
Moreover, it is not clear that the economy is worse off when management of a monopoly uses some of its extra profits to pursue environmental and other non-profit goals. In the short run their stockholders would suffer from not getting full monopoly returns, but others might benefit from their behavior. In the long run, the stockholders of monopoly companies would receive the risk-adjusted competitive rate of return on their capital, regardless of what management does.
There are far more effective ways than corporate philanthropy to help poor nations of Africa and elsewhere speed up their economic development, and reduce the impact of malaria, Aids, and other devastating diseases. Probably the single most important step is to encourage much more competition and market-friendly policies by African and other governments in poor countries. Corporate philanthropy and especially government aid probably has retarded the introduction of such reforms by governments of badly performing countries. In addition, it would help to reduce, better still eliminate, tariffs by rich countries on the agricultural and other exports from developing countries. Foundations like the Gates foundation can encourage more widespread use of DDT and mosquito netting in combating malaria (see my Sept. 24, 2006 post on the Becker-Posner Blog that discusses deaths from malaria), and subsidize the development of new drugs that fight diseases mainly found in poor countries.