I love reading the editorial page of the WSJ. I came across an article a couple weeks back by William Easterly, an economics professor at NYU, about how Bill Gates' recent push at Davos for what Gates called "creative capitalism" was, although admirable, not really going to help anyone. (It's a 36 min video, so it takes some time to watch).
The main point that Gates makes in his speech is that traditional capitalism only benefits those that have money - i.e. those that can participate in the system at all. He was trying to push corporations to to look for innovative ways to incorporate the poorest people of the world into the global economy. He suggested that "recognition" might be one reason a company might want to do that. If companies are recognized for their philantropic works more, that's good PR and free marketing and would motivate them to do more. He used "tiered pricing" as another example for how they might go about it. For example, many products have very small marginal production costs. Instead of selling those products at the same price to everyone, vary the price based on what people are capable to pay. Let's say a vaccine normally sells for $2 per dose in the developed world. You might sell that in the third world for $0.50 per dose instead. He also used the RED campaign as an example. For a commodity product, you could use your RED status as a differentiator to sway civic minded consumers to buy your product over competitors. Sounds good, right? What's the problem with it?
The problem is that it's not sustainable and that it doesn't even remotely leverage the potential of the masses that traditional capitalism does. The "white knight" of corporate philanthropy is not going to solve the underlying problems that are preventing these countries from joining in the world economy. Capitalism works, but you need an environment that is conducive to it. Most countries in Africa and in the developing world just simply aren't conducive to capitalism. An excerpt from Easterly:
I talked about this in a previous post as well - Life, Liberty, and (above all) Property. Property rights, including the absence of corruption that undermines them, are a critical first step towards long-term, sustainable solutions to poverty where the poor help themselves. Another excerpt from Easterly around how that works:
These kinds of changes take a long time. And they're changes that are led by the people themselves and not "saviors" from the outside. We don't need more "creative" capitalism, we just need more capitalism, plain and simple.
The main point that Gates makes in his speech is that traditional capitalism only benefits those that have money - i.e. those that can participate in the system at all. He was trying to push corporations to to look for innovative ways to incorporate the poorest people of the world into the global economy. He suggested that "recognition" might be one reason a company might want to do that. If companies are recognized for their philantropic works more, that's good PR and free marketing and would motivate them to do more. He used "tiered pricing" as another example for how they might go about it. For example, many products have very small marginal production costs. Instead of selling those products at the same price to everyone, vary the price based on what people are capable to pay. Let's say a vaccine normally sells for $2 per dose in the developed world. You might sell that in the third world for $0.50 per dose instead. He also used the RED campaign as an example. For a commodity product, you could use your RED status as a differentiator to sway civic minded consumers to buy your product over competitors. Sounds good, right? What's the problem with it?
The problem is that it's not sustainable and that it doesn't even remotely leverage the potential of the masses that traditional capitalism does. The "white knight" of corporate philanthropy is not going to solve the underlying problems that are preventing these countries from joining in the world economy. Capitalism works, but you need an environment that is conducive to it. Most countries in Africa and in the developing world just simply aren't conducive to capitalism. An excerpt from Easterly:
The parts of the world that are still poor are suffering from too little capitalism. Foreign direct investment in Africa today, although rising, amounts to only 1% of global flows. That's because the environment for private business in Africa is still hostile. There are some industry and country success stories in Africa, but not enough.
I talked about this in a previous post as well - Life, Liberty, and (above all) Property. Property rights, including the absence of corruption that undermines them, are a critical first step towards long-term, sustainable solutions to poverty where the poor help themselves. Another excerpt from Easterly around how that works:
Profit-motivated capitalism, on the other hand, has done wonders for poor workers. Self-interested capitalist factory owners buy machines that increase production, and thus profits. Capitalists search for technological breakthroughs that make it possible to get more output for the same amount of input. Working with more machinery and better technology, workers produce more output per hour. In a competitive labor market, the demand for these more productive workers increases, driving up their wages. The steady increase in wages for unskilled labor lifts the workers out of poverty.
These kinds of changes take a long time. And they're changes that are led by the people themselves and not "saviors" from the outside. We don't need more "creative" capitalism, we just need more capitalism, plain and simple.
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