The View From 1776

As noted in Bono and Bill, Microsoft’s Mr. Gates joins a long line of wealthy, liberal-progressive, capitalist turncoats, a line that includes New Jersey governor Jon Corzine and Citicorp Vice Chairman Robert Rubin.  Now that they have got theirs, they seem impelled to redistribute the income of those still in the work force in conformity with socialist concepts of social justice.

What’s so attractive about making workers poorer by pursuing a policy that has failed wherever it has been applied?

The February 7 edition of the Wall Street Journal carries an op-ed article that amplifies upon that question.

Why Bill Gates Hates My Book
By WILLIAM R. EASTERLY
February 7, 2008; Page A18

This newspaper reported recently that Bill Gates hates my ideas. I have no hurt feelings, at least nothing that months of intensive psychotherapy can’t cure. Mr. Gates, after all, has allied himself with the foreign aid establishment. This establishment is notoriously sensitive to criticism from people like me, who find no evidence that the aid industry’s grand schemes are actually lifting anyone out of poverty.

Mr. Gates has now put forward his own scheme—“creative capitalism”—in a speech at the recent World Economic Forum in Davos. He argues that today’s capitalism does not benefit the poor. For Mr. Gates, regular capitalism works “only on behalf of those who can pay.” While entrepreneurs fall all over themselves trying to meet the needs of the rich, “the financial incentive to serve [the poor is] zero.” As a result, basic needs such as food and medicine go unmet.

Mr. Gates seems to believe that the solution is to persuade for-profit companies to meet the poor’s needs by boosting the “recognition” of corporate philanthropy. But the dossier of historical evidence to suggest this would work is as thin as Kate Moss on a diet. First of all, the recognition motive has proven to be awfully weak compared to the profit motive. Otherwise we would have had a lot more than the $5.1 billion of annual American corporate philanthropy to the Third World (as of 2005, which has the most recent reliable figures). That was four one-hundredths of 1% of the $12.4 trillion of U.S. production for the free market. Is it really the poor’s only hope that the Gap will donate a few pennies per sexy T-shirt for AIDS treatment in Africa?

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.

The number of poor people who can’t afford food for their children is a lot smaller than it used to be—thanks to capitalism. Capitalism didn’t create malnutrition, it reduced it. The globalization of capitalism from 1950 to the present has increased annual average income in the world to $7,000 from $2,000. Contrary to popular legend, poor countries grew at about the same rate as the rich ones. This growth gave us the greatest mass exit from poverty in world history.

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.

Mr. Gates also announced his foundation is starting “a partnership that gives African farmers access to the premium coffee market, with the goal of doubling their income from their coffee crops.” This is fine as a modest endeavor to help a few Rwandan and Kenyan coffee farmers, but it’s hardly going to remake capitalism. The main obstacles to exports in poor countries are domestic ones like corruption and political strife, not lack of interest from rich-country buyers for premium coffee.

Moreover, how do philanthropists choose just which product is going to be the growth engine of a country? Much research suggests that “picking winners” through government industrial policy hasn’t worked. Winners are too unpredictable to be discovered by government bureaucrats, much less by outside philanthropists. Why did Egypt capture 94% of Italy’s import market for bathroom ceramics? Why did India, an economy with scarce skilled labor, become a giant in skill-intensive IT and outsourcing? Why did Kenya capture 39% of the European market in cut flowers? Why did tiny Lesotho become a major textile exporter to the U.S.? Why did the Philippines take over 72% of the world market in electronic integrated circuits? Because for-profit capitalists embarked on a decentralized search for success.

Sure, let those who have become rich under capitalism try to do good things for those who are still poor, as Mr. Gates has admirably chosen to do. But a New-Age blend of market incentives and feel-good recognition will not end poverty. History has shown that profit-motivated capitalism is still the best hope for the poor.

Mr. Easterly, professor of economics at New York University and visiting fellow at Brookings, is the author of “The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good” (Penguin, 2006).