Creative capitalism

Bill Gates seems to believe that the solution to poverty 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 quite thin, says William R. Easterly, a professor of economics at New York University and visiting fellow at the Brookings Institution.

Consider:

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 per cent of the $12.4 trillion of U.S. production for the free market.

Profit-motivated capitalism has done wonders for poor workers. The steady increase in wages for unskilled labour lifts the workers out of poverty, explains Easterly. For example, 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 globalisation 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, says Easterly:

Foreign direct investment in Africa today, although rising, amounts to only 1 per cent 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.

Source: William R. Easterly, Why Bill Gates Hates My Book, Wall street Journal, February 7, 2008.

For text: http://online.wsj.com/article/SB120235183917849631.html

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 12 February 2008