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.
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Your understanding of capitalism is on a very basic level. In this country, we have evolved capitalism into a big government machine. And do you know who is responsible? The same business innovators that you so adore. Back at the turn of the 20th century, such criminal entrepreneurs created the Federal Reserve System and income taxes to subsidize their struggling businesses. J.P. Morgan was the largest proponent of this idea and helped get the political support to pass it. When government starts subsidizing business, we enter into a light fascist model which is what we practice today. The problem with social programs is that if you get a leader like GWB in office, they can be destroyed and that is why I am against them! But I have no problem with corporations giving back to society when they have "taken" tax payer money so they can succeed in business. If we are going to subsidize, they need to give back to society what they owe. All government subsidies and social programs should be voluntary anyway just like charity contributions and religious donations. And as a final word, when U.S. businesses go into a country and "TAKE" people's resources, isn't that a crime? Isn't that also the reason why socialism became a political philosophy and why people are CORRECT in their belief that self-interested capitalism has created more poverty than any other economic system?
I have worked for social service agencies for most of my life. They were in both private and government sector. I have found waste, idiocy, and rank stupidity to be the norm. Most money is wasted on salaries to people who do not deserve the salaries. Such groups easily lose sight of their real purpose and become chained to the instinct for survival which rivals and overrides any initial purpose they had . Basically no matter what economic system you are working in you will have the same problems. At least Gates has made a decision to invest in the health of the people.
Among Prof. Easterly's opines: "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."
Over-gener
In fact, without references, he would probably grade this article "D-" if submitted by one of his students. I give him an "F" because he should know better.
You see, it is a matter of purpose. Is America of business by biusiness for business? Or is it of people, by people and for people? Does the corporation exist for the people or does thepeople exist for the corporation? THe answer is easy. If we are guaranteed equality by our constitution, then existence of the many for the few is unconstitutional.
We are not guaranteed equality of outcome by the constitution. Only equality of opportunity. If one wishes to sit on ones hands and not try to find opportunities for success, then they have not the right to success.
A problem with capitalism is the very nature of "demand". Demand is defined as having a want and also having the money to pay for it. No money, no demand. You could be a homeless person with a burst appendix, but since you have no money, you have no "demand" for medical attention. You die. This would not occur in a single payer social ( i.e. socialist) healthcare system. You choose which is better. But... problem is that if you are poor no body really gives a shit about you. At least in the capitalist sense. So even the most beginning economics student can spot this shortcoming of capitalism from the social system standpoint.
The only hope with creative capitalism is that the christian notion of being your brothers' keeper is filtered in to the income accounting ledgers.
Mr. Easterly,
Thank you for raising these questions.
I do not understand why you dismiss Creative Capitalism. It is not an attack on traditional capitalism. Nothing in Mr. Gates's speech suggests that Creative Capitalism cannot coexist with traditional capitalism
Philanthropic Capitalism would be a better term than Creative Capitalism. Philanthropic Capitalism implements philanthropic goals via a capitalistic mechanism.
The aggregate assets of all philanthropic organizations are relatively small - probably less than 100 billion. These sums could easily be burned through as gifts in one year and still there would be great need. Capitalistic mechanisms allow the philanthropic goals to be achieved while returning the liquid assets to the philanthropic organization so that they may be reused on other philanthropic goals. Philanthropic Capitalism is a great multiplier of effective assets.
Philanthropic capitalism is best implemented by relatively unencumbered organizations. Governments have too many constituencies to be adequately flexible. Large public companies can dabble in Philanthropic Capitalism but never to an extent that would affect profits. The best organizations for Philanthropic Capitalism are either privately controlled or chartered as philanthropies.
Economic and social systems continue to evolve and one of the greatest questions left is how they will evolve. We should be open minded about the possibilities
The Fountainhead got it right.
Capitalism is a-moral. It's like a toaster, or a car, or a hammer. The result of it is only going to be as good as the people (and their associated level of morality) using it.
"Capitalism is based on greed". What is wrong with greed? Greed and self-interest are not inherently destructive. But forced altruism is. Big government is based on theft (taxes). U.S. federal, state, and local governments are "designed to maximize profits" as much as any corporation is. And that's what government really is. - a corporation - but one that uses firearms (or the threat of the use of them) to ensure their customer base never goes away.
In aggregate, there has been much more destruction, death, and misery throughout history at the hands of government than from traditional for-profit corporations.
Traditional for-profit corporations, like the 19th Century ones using child labor, and 14 hour days, seven days a week.
Actually, greed and self-interest IS inherently destructive. Unfettered, the result is a stratified, classed society that results in instability, and ultimately, revolution.
Criticisms:
1) Market capitalism is a theoretical economic model. It's not the way our economy works, and it never will be, because it is based on a gross simplification of the human condition that will never accurately reflect or predict our behavior. It's a straw-man argument to ask for a model that works better, when all that really needs to be done is to do a better job of putting the model to practical use as a real economic system serving complex socioeconomic structures.
2) Productive efficiency, whether in the form of automation or consolidation, eliminates jobs and reduces the level of skills and wages associated with the remaining jobs. The resulting decrease in labor value per unit output (i.e. GDP) reduces the portion of that output that can be consumed by workers and makes our economy more reliant on owners (of income-generating assets) for demand-side consumption. I hope Wall Street likes shopping at Wal-Mart.
3) If "traditional capitalism" is represented by institutions such as the World Bank, than it has been an unmitigated disaster for the developing world and potentially for the entire global economy. Decades of tying loans and aid to the abandonment of public investment in domestic agricultural infrastructure (creeping socialism.
Captitalism works well when it is transparent and regulated and confined to one country's laws and labor pools. The multinational capitalism as boosted by U.S. taxpayers and the U.S. army is a terrible monster that has already eaten half the world and grievously wounded the rest.
This whole project is revolting. Its run by rich people who want to have their cake at compound interest and eat it too. We're supposed to trust them? We're supposed to tell them how beautifully they scatter crumbs? If not, just... write an essay they won't read, then shut up about it.
It works very thank you
Right now, in this country, it is working well only for a very few. Uregulated capitalism isn't going to work long term, history has highlighted this point time and again in this country; these insanely steep boom / bust cycles will eventually result in a major uprising.
The hardcore Friedmanites need to start adjusting their mindsets to accept revisiting the Keynesianism apporach to capitalism
Capitalism and the so called "free" market work well when one can assume all of those involved are at relatively similar levels of ownership/wealth. Once that premise starts to fail you no longer have buyers or sellers who are freely choosing to buy or sell. A free market has strong tendencies to become the opposite of a free market. in the sense that monopolistic tendencies arise and the losers in a cycle become increasingly coerced in future transactions. Government services tend to be such that they favor and give advantage to those who already have an advantage. Disproportionate accumulations of wealth give advantages to those on top. government is never uninvolved and generally has enhanced the disparity. Most times of general economic prosperity have been times when wealth was more evenly distributed. When government allows and assists in enhancing disparities the economy is not usually healthy.
I hope ol' Bill is making an honest effort to do the right thing, or, if he isn't, that he'll issue a service pack soon that does.
Nah, he'll probably just ram Philanthropy-Vista down our throats!
There is no such thing as "traditional capitalism"? The nature of the capitalism as it is practiced in the United States has been changing regularly ever since it started.
In the early years, we had predatory capitalism. Ever since then inroads have been made on predatory capitalism. Today, we no longer have predatory capitalism, just as we no longer have the capitalism practiced seventy years ago, or fifty years ago. We found that largely unregulated capitalism didn’t work because it begot such evils as child labor, unsafe working conditions, exploitation of the poor through long working hours and poverty level wages, unsafe food and drugs, exploitation of natural resources and the environment, deception of consumers, dishonest and fraudulent business practices, etc. It became clear that in order for capitalism to work in a fair and balanced way, it had to be socialized, that is, made fit to live among the people without exploiting them.
It is still capitalism, but it bears little resemblance to the predatory capitalism of the late nineteenth and early twentieth centuries. These various laws and regulations may be said to have the purpose of socializing predatory capitalism so as to make it fit for the general population.
Because of this socialization of capitalism, we now have child labor laws, wage and hour laws, industrial safety laws, food and drug laws, business regulation laws, securities regulation laws, environmental protection laws, usury laws, deceptive advertising laws, consumer protection laws, etc.
I have read your writings as well as Dr. Sachs and, even though they are supposed to be diametrically opposite, they seem to complement each other. I agree that capitalism has been a great engine for the elimination of poverty, but I think that the model can be updated in the same way that cars are now going hybrid and hopefully in a near future fully electrical or based on hydrogen. The benefits of traditional capitalism can not be denied, but there are a lot of issues that it needs to address to be accepted as a model that is good for all (environmental and labor conditions for example). The portion that is the most important about your writings is the emphasis on concrete actions instead of public demonstrations, which at the end are the ones that have the largest benefits. I also echo your effort for more accountability and review process on Aid institutions (World Bank, US AID), but I don't think that the lack of them block the efforts of advocacy organizations that focus more on PR (ONE Campaign, The Gates Foundation). I commend you for your long career on development and economics and your constant push for concrete actions (large or small) to create a more just environment for all.
If your argument were true real wages would not be flat.
Capitalism has no intrinsic morality, no altruistic intent. Granted, under some scenarios it might create wealth throughout a society, but in this one the rich are becoming richer and the poor are becoming poorer.
Capital should be gainfully employed, and a free market economy is an effective means to that end. But how does one justify the obscene amounts paid to factors?
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