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Gates misses the point on 'creative capitalism'

perspective The Microsoft chairman's well-intentioned pitch for corporate activism missed the root causes of poverty. (Hint: it's not lack of corporate charity.)

Editor's note: CNET News.com editor at large Michael Kanellos and chief political correspondent Declan McCullagh are facing off over Bill Gates' call for businesses to allocate resources that could alleviate problems in the developing world. Click here for Kanellos' take.

perspective Bill Gates wants the world's businesses leaders to embrace what he calls "creative capitalism." But would that really be wise?

Consider what the Microsoft chairman said in a speech Thursday to the World Economic Forum in Davos, Switzerland. The outlines are a little hazy, but creative capitalism seems to center around companies spending money (or taking on money-losing projects) that are seen as socially desirable. To Gates, it's "market-based social change" that amounts to "doing work that eases the world's inequities."

If this sounds familiar, it should. It's an attractively repackaged call for activism that's been kicking around for more than four decades under labels like "corporate social responsibility" and "caring capitalism." Gates' well-intentioned suggestions would shift these efforts from domestic charity to international charity aimed at poorer nations.

But what his Davos speech didn't acknowledge is that corporations already provide money to communities and charitable causes. They pay employees and managers, who are able to write checks to charities as they see fit. They pay suppliers, which do the same. Perhaps most importantly, they return profits to shareholders, who have the choice of what charitable projects to support.

And Americans tend to be incredibly generous, even after the government mandates forced giving through taxes. After the Asian tsunami, the U.S. government coughed up $900 million in taxpayer-funded relief. But private individuals donated around $2 billion. Overall, Americans give a staggering $260 billion to 1.4 million charities a year. (By comparison, NASA's entire budget for 2007 is around $16 billion.)

Would the world be well-served if this ecosystem became subject to the whims of managers writing checks to charities they personally prefer? There's no reason to believe CEOs can claim special competence in deciding how charity should be dispensed. If anything, the individual shareholders who participate and research nonprofit groups and churches (and know firsthand which are most deserving) are in a better position. Not all decisions benefit from centralization; there is wisdom in distributed decision-making.

Although it may not be politically correct to say in some circles, there is a stronger argument to be made against "creative capitalism," and it is that profits come from serving society. The larger the profits, the better job the company tends to have done. Profit maximization is a worthy goal by itself.

This is what the late Nobel laureate Milton Friedman wrote in his famous 1970 essay for the The New York Times Magazine titled "The Social Responsibility of Business Is to Increase Its Profits." In 2005, Friedman elaborated on it, saying that the doctrine of social responsibility was a "socialist concept" and that activists are not stakeholders but "problems for running the business."

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Of course, some businesses have found that embracing "social" goals can boost profits: the list includes Ben & Jerry's, Celestial Seasonings, Patagonia, Stonyfield Farm, and Whole Foods. Cypress Semiconductor, run by the free-market capitalist T.J. Rodgers, has won trophies for the most food donated per employee in Silicon Valley for over a decade. Rodgers calls it "a big employee morale builder, a way to attract new employees, good PR for the company, and a significant benefit to the community--all of which makes Cypress a better place to work and invest in."

Rodgers is forthright enough to admit it: social responsibility tends to be savvy public relations efforts that generate favorable press coverage and save millions of dollars a year in advertising.

Ben & Jerry made themselves rich by selling the concept of "social responsibility" and the spirit of the 1960s to the aging baby-boomers who gobble up Cherry Garcia and Dave Matthews Band Magic Brownies.

But an article last month in Newsweek makes clear that the ice cream maker's "social responsibility" includes hardball tactics and disgruntled franchisees that accuse the company of not being nearly as sweet as its image. And Ben & Jerry cashed out long ago by selling the company to Unilever, maker of non-crunchy products like Axe body spray, Vaseline, and Lux hairspray.

Social responsibility, in other words, only goes so far.

Gates also warned that profits may not be enough of an incentive by themselves to feed the world's poor, clothe the needy, and feed the hungry. Gates said recognition should be a kind of alternate currency: "In markets where profits are not possible, recognition is a proxy; where profits are possible, recognition is an added incentive."

Related podcast
News.com's Michael Kanellos and Declan McCullagh
share their differing views.

That's probably a great deal for executives who can be feted at gala dinners. But it's hardly clear that rank-and-file shareholders and 401K plan holders who individually own a tiny share of, say, a spoon-making company (and collectively own the vast majority of it), will value the "recognition" they receive for owning a sliver of a "socially conscious" spoon maker rather than one that isn't.

What's a little disappointing is that Gates missed the opportunity to make a crucial point: that the reason poor countries remain poor and their citizens can't afford life-saving drugs is not that they receive insufficient charity on the part of wealthy nations.

The reason is that governments in the poorest countries are corrupt, nondemocratic, and repressive. Property rights are not secure, denying would-be entrepreneurs the chance to take out loans against their homes to raise capital. Court systems are nonfunctional, limiting individuals' ability to enter into contracts with one another. Foreign aid is diverted by corrupt officials to Swiss bank accounts (in sub-Saharan Africa alone, the amount diverted was $150 billion in 2005). Food aid depresses prices, undercutting local farmers.

Those reasons, not "noncreative capitalism," tend to be the root causes of poverty and misery in those unlucky nations. Adam Smith, the father of modern capitalism, figured this out more than 200 years ago when he wrote: "By pursuing his own interest, (a businessman) frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."