Should Businesses Save the World?

Wednesday, January 14, 2009

Michael Maiello is Editor of Intelligent Investing for

At the World Economic Forum last year, Bill Gates, who is as successful a philanthropist as he is an entrepreneur, introduced an idea he calls “creative capitalism.” It’s an attempt to harness the power of private ownership and laissez faire to improve lives while fixing what he sees as the major flaw in that system.

Capitalism responds well to demand, but not at all to need. Or, as Warren Buffett colorfully puts it, the market will always provide an incentive to sell Viagra to wealthy old men, but “it won’t make research worthwhile for some disease that is indigenous to the poorest parts of the world.”

Slate’s founding editor, Michael Kinsley, has attempted to unpack Gates’ idea. Forty people show up for the discussion, including Barack Obama’s economic adviser Larry Summers, Nobel laureate Vernon Smith and Judge Richard Posner. The result is a mish-mash of economic opinion that reveals that nobody, not even Gates, really knows what creative capitalism means.

In brief: “In a system of pure capitalism, as people’s wealth rises, the financial incentive to serve them rises. As their wealth falls, the financial incentive to serve them falls–until it becomes zero.” As a result, Gates encourages capitalists to find new incentives to serve the world’s poor.

Some of this is inspired by C.K. Prahalad’s book The Fortune At The Bottom Of The Pyramid, whose motivation is simply old-fashioned profit chasing. If you can’t find a way to make money in sub-Saharan Africa, Gates argues, you might not be looking hard enough.

But Gates also realizes that sometimes there’s no profit there. So, he reasons, companies might well lose a little money (or make less of it) in exchange for recognition and good will.

This is the premise behind U2 frontman Bono’s “Red” campaign, in which consumers pay a little more for the same product in order to feel warm and fuzzy about their convenient contributions to charity. Gates suggests that companies associated with good causes will attract better workers, and so the business will profit in the long run.

What follows is, logically, an argument about the proper role of the corporation in public life. In Milton Friedman’s classic essay “The Social Responsibility Of Business,” which is reprinted in Creative Capitalism’s afterword, he argues that corporate executives have one responsibility–to maximize profits for shareholders.

Any social good that results is purely accidental, and any boardroom do-gooderism smacks of theft. Let the shareholders have their money, Friedman says, they can pursue their own philanthropic goals.

The tension between Gates’ philosophy and Friedman’s dominates the book. That’s too bad, because it is perhaps the least interesting issue related to social responsibility. Take the larger point in Friedman’s essay that goes largely ignored in the book–that improving the world is rightly the job of governments not corporations.

Gates’ desire to have corporations step in where governments have failed might sound promising, but it really amounts to unelected executives taxing their shareholders (and to a lesser extent, their customers) to accomplish something that the political system has already decided isn’t worth taxing people for.

Gates can, of course, spend his own money however he wishes. But if he uses his control over Microsoft to force his shareholders and customers to support the causes he thinks are important, then he’s abusing his authority. Who elected Gates? Who can hold him accountable?

Former Labor Secretary Robert Reich addresses these questions in a short essay called “Why Creative Capitalism Gets In The Way Of Democracy.” In it he points out (far too gently) that Microsoft, Yahoo!, Google and Cisco have all quite legally helped the Chinese government oppress its people by removing offensive blog posts, trapping Chinese Web surfers in a government-sanitized cyberspace and selling equipment to the Chinese police.

Reich believes that it’s ultimately the government’s responsibility to decide whether or not companies should be “barred from cooperating with dictatorial governments to abridge human rights, even if it means losing business.”

But between lobbying and campaign donations, business has rendered the government virtually impotent. Congress held hearings about the China issues, but no legislation followed. If companies really want to do some good, Reich argues, they should “refrain from flooding Washington and any other seat of government with so many lobbyists and campaign contributions so as to stymie democracy.”

The discussion of poverty in Creative Capitalism reveals one of Gates’ most dangerous blind spots. He seems to think that poverty is a exclusively a third-world phenomenon and, as a result, he’s willing to punish the poor in his own country in order to do something about it.

For example, Gates likes the idea of tiered drug pricing, a plan under which companies sell medicine cheaply in Africa while inflating the price in the U.S. to make up for it.

This is, effectively, a tax private companies would levy on American patients. If U.S. citizens want to elect representatives who will decide that we should underwrite global health care by paying more for drugs, that’s fine. But should Pfizer or Merck have the power to tax U.S. patients?

Further, why is there so much concern for people who need medicine in the third world and so little for people who need medicine here? While some of the book’s other arguments are lackluster, Gates has overstepped his bounds most egregiously by presuming to make these decisions for the American people.

Source: Forbes (link opens in a new window)