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 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.
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.
Follow William Easterly on Twitter: www.twitter.com/bill_easterly
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Mr. Easterly seems to separate the capitalist corporations from the societies in which these corporations exist. American corporations take for granted the society, and the benefits it gleans from existing in the society. Many of the posters here seem to do the same.
Corporations benefit disproportionately from the US infrastructure such as transportation, communication, education, law and order. It would be in the long term interest in regard to the survival of these companies, that they take more interest in the structure and health of the society itself.
Education is one easy example. The better educated the society at large is, the better quality of employee the company can hire. While the job of education might fall to the society, corporations would be well served to influence the quality and direction of the education in a way that would more benefit the society, and, ultimately, themselves.
Pay structure might be another example. The better the employees are paid, the more disposable income they might have to buy the company's products.
To separate the long tem relationship of the corporation from the society is a loser. Altruism is not the idea, nor the goal, I would choose to use. Targeted enlightened self interst seems a better strategy.
Socialism on it's own fails, as does Capitolism, to adress the needs of every individual. It is only a combination of both that will lead to a structure of true freedom. But we must decide what our moral priorities are--is it ok for anyone to go without food, even if they "deserve" it? Is it ok for people to not have clean drinking water, even if they don't have two dimes to rub together? On planet Earth? But, you see, where is the incentive? I certainly don't want to lay a bunch of pipes for free so someone has water, but I also believe that there's plenty of water for all. This is what government is supposed to do--it's supposed to be an organizing tool for the people to create the conditions necessary to thrive.
One is not wrong and the other right--socialism and capitolism combined can work wonders.
Exactly right. People like Gates are supposed to be intelligent enough to find constructive ways to use their profits to build new industries. That is one of the basic ideas of traditional capitalism. Instead people like Gates and Leona Helmsley are showing they do not have a clue on what to do with money, but they know their relatives do not need it. They ought to be seriously taxes so the money is not used in a deranged way.
Lou Dobbs has been saying all this about Bill Gates for years but he gets called a racist..and accused of xenophobia...!
Could Prof. Easterly have posted opinions he doesn't hold or believe? If so, why?
Perhaps to draw attention and comments to an issue in which he's very interested. From college, I remember the head of the Psychology Department talking about a journalism "war" he was about to start with a colleague at another university.
They were colluding to setup controversies about some Social Psychology issues to draw attention and interest in areas they wanted academia to pursue. I used a similar technique as an Air Force officer to get some of the best ideas from my NCOIC.
I would enthusiastically tell him an absurd idea. His first words, "Lt. we can't do that!!! How about..." Then we would come up a great solution. Of course, I didn't use the technique very often. When I did the results were fantastic and our working relationship improved.
I'm sure the good Prof. is aware of the techniques. Hope he likes the results. I do. Thanks, Prof and to y'all for your comments.
It is difficult for many to imagine how much a billion of something is.
To put things in perspective,
The entire Kansas state budget totals about $6.0 billion a year, half of which is for education. With a population of 2.7 million, Kansans get about $2,000 in state services per resident per year.
$6.0 billion buys about 120,000 jobs at $50K a year, the payroll for a mid-size american city.
$6.0 billion would give each Haitian about $100 to live on for the year, about their normal annual salary.
Comparing the mininscule amount of charity relative to the world's problems proves Mr. Easterly's point that philantrophy is mostly for publicizing the donor's egos.
Mr Easterly's second point: That Business/philanthropy is not an effective means to help the poor, strikes me as accurate. Such efforts are doomed to be insufficient and piecemeal. This is why, I suggest, such efforts are best approached through a centralized, coordinating body (e.g., Government).
You put forth an initial assertion, Mr Easterly, with which I have to strenuously disagree: "The accusation that traditional capitalism fails to help the poor is false."
To prove yoru argumnent, you make three "sub-points," which strike me as singularly unfounded, in post-2000 America:
* As firms expand their production to meet more of rich people's needs, they hire more unskilled labor to do so, driving up employee incomes.
* As firms invest in machines to increase production, they increasing wages.
* As firms employ new technologies to increase productivity, they drive up wages.
At one time, all of this was true. But as the last eight years so clearly demonstrate, the correlation between productivity and wages no longer exists. Business productivity has continued to increase significantly since 2000, but little or none of that is seen in wages. Instead, it goes to profits and Executive compensation. Further, Business is in a perpetual "cost cutting" mode, and "people" are the biggets costs. Companies don't hire to meet increased need to a fraction of what they used to. they simply raise prices on "increasingly scarce goods."
I perceive Mr Gates' point as still being on target and accurate.
Increased productivity is also devoted to lobbying and advertisements. Two real options often chosen in real life but rarely considered in analysis.
Cathexis,
Well said. The myths espoused in Easterly's article are debunked historically and there is no evidence to support the notion that his examples support his argument other than his claim that they do. Virtually every example Easterly offers to show that his preferred from of capitalism raises living standards and improves the plight of the world's poor can actually be shown in the real world to do exactly the opposite, unless it is heavily regulated and controlled. Of course, today's form of "traditional" capitalism, "corporatism", spends more money and resources fighting those controls than it spends helping society.
And that raises another issue: what is TRADITIONAL capitalism? I would argue that it is not the corporatism that reigns America today. So there is confusion as to which form of capitalism each one, Easterly AND Gates, refers.
Education, information, knowledge, enlightenment have always been the best tools for lifting the oppressed peoples out of oppression and poverty, which is not to say that a good angry revolt doesn't help -- corporatism based in over-consumption requires an impoverished working class in order to function, and to sustain the wealthier few.
When corporations control the government, there is fascism. Look it up in the dictionary. The Nazis were socialistic because they had to appeal to the communists and the socialists and the fascists.
A false either or choice is presented here. Mr. Gates is no political scientist but he is smart enough to see that a problem exists. A system that permits monopolies, cartels and ownership of the representatives of our government is not working for the "general welfare." There is a preamble to the constitution that so many "pure capitalists" seem to ignore. The Founding Fathers never envisioned a system where the East India Company would run our government for their own benefit.
The Founding Fathers would have concluded that the American Revolution was not worth the battle just for a substitution of oligarchies. At least Gates understands this fact.
The experiment that is 'traditional capitalism' is failing. "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." There is such a system: Developmentalism. Which includes nationalization of critical infrastructure (rather than letting foreign companies control it), investment of public funds into large-scale public works, cessation of the Federal Reserve Bank, creation of not-for-profit lending, an end to the privatization of our military, etc. There is nothing in traditional capitalism that addresses these issues.
Traditional capitalism is the culprit that would have Dubai Port Authority running our ports and GM opening factories in China while closing American plants. Traditional capitalism lacks any sense of patriotism if the same does not include profit. While this certainly benefits a tiny echelon, it does little for the great majority of Americans. Furthermore, if people vote based on their self-interest (the creed of traditional capitalism after all), then the days of unfettered capitalism are numbered...
Mr. Easterly's description of the workings of capitalism sounds a lot like Bush trickle-down economics to me. And we know how well that works.
I didn't bother reading after your first paragraph, the one about trickle down economics...
Here is why, one of the largest groups of homeless people in the US today is veterens. They are generally unemployable, suffering from perminant pshycological damage because (to quote Patton) "War is Hell1"
So how is a business hiring more people, or becoming more productive, going to help those vets? Oh, right, it isn't. Guess you are just saying screw the vets, who cares about them, I've got a bottom line to watch.
I'm not saying Gates isn't a hack who couldn't fix a computer if his life depended on it (hence why microsoft had to go to HP for tech support), but he is a marketing genius, and he may have a better graps on this issue than you do.
That quote actually comes from General Sherman.
there is no country in the world that is 100% capitalist, as there is no country in the world that is 100% socialist. There is a continuum. The only question is where does a society draw the line.
As for the comments about Mr. Gates, US capitalists believe a business belongs to the capitalists who financed and runs it, so the obligation of a business is to the owners (shareholders). But a case could be made that a business has an obligation to the society that allows it to exist, and provides the educated labor of the employees, as well as the stable infrastructure that supports the business. That a business affirms the society is enlightened self-interest.
But, then, Americans seem to have no concept of enlightened self-interest.
Unfettered capitalism has proved itself an amoral, ill tempered beast.
Capitalism done well is a great way of generating lots of income. The problem is that capitalism is indifferent - at best - as to how the income is distributed.
Historically, capitalism has been a tool the powerful have used to keep the lions share of the money to themselves. Since the poor are usually not the ones with the power, they usually get significantly less. Trickle down economics may work, but people usually need more than a trickle.
I think this problem is more intrinsic to human nature than to capitalism.
It is good to see pioneers like Bill Gates and Muhammad Yunus focusing on using capitalism as a tool for empowering the poor along with the powerful. It remains to be seen whether this experiment can overcome the challenges posed by human nature.
Actually, capitalism is exceptionally efficient at deciding how the money is distributed. It is distributed to those that earn it. That is what causes people to get up and go to work everyday.
The root of capitalism is freedom: freedom to do what you want. That is so very important because while it does give you freedom to think up an idea and build a company worth millions of dollars, it also gives you freedom to screw around in high-school, skip college or major in something useless and then whine the rest of your life that you aren't getting your fair share.
Actually earning it has little to do with distribution. Government gives to those it deems owners a great deal of leverage in determining who gets what from the produce . Most of the rich no longer have to do much of anything to receive the lion's share. All they have to do is invoke government to leverage most of the income. the people without ownership interest have to work as much as the owner deems profitable for modest income. in theory your system distributes income in such a way that it maximizes production but it does not optimize the use of resource unless you believe that the marginal luxury item of the wealthy is more valuable than the subsistence of the poor.
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