Bill Gates on Corporate Philanthropy--Posner

From: http://www.becker-posner-blog.com/archives/2008/02/bill_gates_on_c.html

I became acquainted with Bill Gates when some years ago I mediated (unsuccessfully) the Justice Department's antitrust suit against Microsoft. I was reassured to discover that the world's wealthiest person is extremely intelligent and surprisingly unpretentious. But I am disappointed by the recent speech on "creative capitalism" that he gave at the World Economic Forum in Davos last month.

Almost half the world's population is extremely poor, subsisting on less than $2 a day; a billion are thought to subsist on less than $1 a day. Most of the very poor live in sub-Saharan Africa and in southern Asia. Gates argues that the key to alleviating their poverty is "creative capitalism," whereby private firms in the United States and other wealthy countries seek both profits and "recognition" (praise) in serving the needs of the poor, for example by developing technologies designed specifically for their benefit. C. K. Prahalad, a business school professor admired by Gates, notes that Microsoft is "experimenting in India with a program called FlexGo, where you prepay for a fully loaded PC. When the payment runs out, the PC shuts down, and you prepay again to restart it. It's a pay-as-you-go model for people with volatile wages who need, in effect, to finance the purchase."

If there are good business opportunities in poor countries, however, it does not require Gates's urging for businesses to seek to exploit them. So the only meat in his concept of creative capitalism is his proposal that businesses accept subnormal monetary returns in exchange for getting a good reputation as do gooders. But if a reputation for good works has cash value, then, once again, there is no need for Gates to urge businesses to serve the poor; self-interest will be an adequate motivator. If it is true as he says in his speech that "recognition enhances a company's reputation and appeals to customers; above all, it attracts good people to the organization," then creative capitalism pays because it enables a firm to charge higher prices to its customers and pay lower quality-adjusted wages to its employees. Whether this is true of a given firm's customers and employees is something that the firm is better able to gauge than an outsider, even so distinguished a one as Bill Gates.

If on the other hand reputation does not have cash value, or enough cash value to offset the reduction in financial returns that would result from conducting one's business in such a manner as to obtain a reputation for altruism, then the motivation for creative capitalism would have to be businessmen’s feeling good about helping the disadvantaged. But which businessmen--corporate managers or investors? Do shareholders--the corporation's owners--feel good when corporate management picks objects of charity, unless the charitable giving feeds the bottom line (as when a firm makes charitable donations to activities and institutions in the places in which it has its plants or offices)? Unless shareholders are eager to see their corporations give massive amounts to charities that are chosen not by the shareholders but by management and that do not contribute to corporate profits, it is hard to see how urging businesses to be disinterestedly charitable can have a significant effect. A business that fails to maximize profits places itself at a competitive disadvantage relative to businesses that do maximize profits. Only if charity contributes to profits is it a plausible investment for an investor-owned firm.

There is a hint in Gates's speech that profit maximization is the real goal, and the question for "recognition" a veneer. When he talks up "business models that can make computing more accessible and more affordable," it sounds as if he may be trying to develop new markets for Microsoft. That is also the implication in Prahalad's statement that I quoted. Gates talks about "markets that are already there," that is, in poor countries, "but are untapped." In other words, there are business opportunities in poor countries, and business opportunities require imagination rather than altruism to exploit.

A curious omission in Gates's speech is a theory of why so many people are desperately poor. When he says that "diseases like malaria that kill over a million people a year get far less attention than drugs to help with baldness," he does not pause to inquire why that is so. It is so, first of all, because people in wealthy countries do not suffer from malaria, and, second, because cheap but highly effective methods of combating malaria, such as mosquito netting and indoor spraying of DDT (which would have few negative environmental effects, unlike outdoor spraying), are somehow not provided, but for reasons political and cultural rather than financial. We know that a nation doesn't have to be rich in natural resources to be prosperous. The essential ingredient of economic growth is human capital, and it depends primarily on the existence of a political system that prevents violence, enforces property rights, provides a minimum level of public goods, and minimizes governmental interference in the economy. Without such institutions, economic growth will be stunted; altruistic capitalists will not cure their absence.

Gates has discovered the Adam Smith of The Theory of Moral Sentiments, where Smith argued that people are not purely self-interested, but instead are actuated, to a degree anyway, by altruism. But modern studies of altruism find it concentrated within the family and trace it back to the "selfish gene"—helping someone who shares one's genes may increase the spread of those genes in subsequent generations, and if so there will be natural selection for a degree of altruism. And so as the relationship between people attenuates because of distance, race, and other factors, the degree of altruism declines. That is one reason that Gates's argument that "recognition enhances a company's reputation and appeals to customers; above all, it attracts good people to the organization" falls short. Few customers will pay more, and few skilled workers will accept lower wages, to benefit poor people in distant lands.

Finally, I take issue with Gates's assumption that alleviating world poverty is an unalloyed social good. He calls himself an optimist, but some might describe him as a Pangloss, when he says that "the world is getting better" and will be better still if there are no more poor people. If Gates said that prosperity, longevity, and other good things have increased in most of the world, he would be right. But there is no basis for predicting that these trends will continue, given such threats to peace and prosperity as international terrorism, political instability, nuclear proliferation, and global warming. And if creative capitalism does succeed in lifting billions of people out of poverty, the problem of global warming will become even graver than it is because the world demand for fossil fuels will soar.