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Tuesday, January 13, 2009

The Do-Good Marketplace

As posted by: Wall Street Journal

Speaking at last year's World Economic Forum in Davos, Switzerland, Microsoft founder Bill Gates called on "capitalism" to become more "creative" in finding ways to help the world's needy. Government and philanthropy had important roles to play, he said, but neither could accomplish as much as business in reducing social problems such as poverty, disease and malnutrition.

Although Mr. Gates's speech received considerable attention at the time, its substance was not particularly novel. For at least a decade, high-tech billionaires, including eBay's Pierre Omidyar and Jeffrey Skoll and Google's Sergei Brin and Larry Page, have been looking for ways of achieving their philanthropic goals through business-like activities. The search for profit-making ventures that also improve the world -- by means of "social entrepreneurship" or "philanthro-capitalism" -- is now the rage at business schools, and it has given rise to countless books, competitions and consulting groups. In 2006, one of the best-known practitioners of social entrepreneurship, Muhammad Yunus, won the Nobel Peace Prize for developing the micro-lending Grameen Bank. President-elect Obama has promised to create a federal "social entrepreneurship" agency.

Not everyone is convinced, of course. Critics fear that efforts to combine philanthropy and business will hurt the former by thwarting philanthropic effort in controversial areas and by de-emphasizing philanthropy's helping mission. Some also question whether capitalism is really apt to be more effective than philanthropy or government when it comes to aiding the poor, especially in Third World countries that lack health care and social services or honest political and economic institutions.

In "Creative Capitalism," Michael Kinsley and Conor Clarke have enlisted a distinguished group of economists, journalists and executives of nonprofit organizations to assess Mr. Gates's speech and its social-entrepreneurship theme. Their responses (which originated as entries in a "web-based discussion," as Mr. Kinsley puts it) range from strongly supportive to sharply critical. One of the more interesting ideas found in this somewhat rambling book contends that "philanthropic" business activity is in fact at odds with what is best about capitalism itself and thus counterproductive.

Lawrence Summers, the former Harvard president and former Treasury secretary, states the difficulty succinctly: "It is hard in this world to do well. It is hard to do good. When I hear a claim that an institution is going to do both, I reach for my wallet. You should too." He offers as an example Fannie Mae and Freddie Mac, government-created corporations that were supposed to achieve a social goal -- affordable housing -- while operating as businesses. They did neither well, eventually leaving their catastrophic debts for taxpayers to pay.

U.S. Circuit Court Judge Richard Posner, along with other contributors, notes that companies often suffer losses when they set out to address a social problem. If they could really make a profit by doing good works, the argument goes, they would no doubt already be hard at it. But if they do good works at the expense of profit, they will become less efficient, making themselves more vulnerable to competitors. Economist Steven Landsburg suggests that companies sacrificing profit to accomplish philanthropic goals end up betraying their shareholders, who rightly expect the best return on investment. Sometimes acting philanthropically will result in an indirect business benefit, such as improving worker skills. In that case, philanthro-capitalism might be in a company's interest -- but Judge Posner and others of like mind suspect that such instances are rare.

Their skepticism echoes Milton Friedman's objections to "corporate social responsibility," expressed in a 1970 article that is usefully reprinted in the book's appendix. Business professor David Vogel argues that "creative capitalism" is indeed a descendant of "corporate social responsibility," which has attracted support from corporations throughout the world, if only to improve their public images -- a kind of business benefit, to be sure. "Managers can plausibly claim that virtually any corporate expenditure on good works is in the interest of its shareholders," he writes, because subsidizing good works is "a form of risk management or public relations" that protects the company's reputation and brand. But even Mr. Vogel is hard-pressed to make an economic case for philanthro-capitalism. At best, he observes, companies that embrace an aspect of "social responsibility" do not seem to suffer much harm; but they do not prosper either.

Other contributors to "Creative Capitalism" are more sanguine about Mr. Gates's campaign. Markets are not perfect, they say, and businesses may need to be encouraged to look harder at opportunities for profitable enterprises in poorer countries, not least where failed governments are incapable of providing public services. In any case, as Harvard economist Ed Glaeser argues, consumers and investors may not be as single-mindedly profit-oriented as Milton Friedman perceived. Companies that try to balance doing good with doing well may reap rewards that their less altruistic rivals miss.

In the end, these differing judgments are left unresolved, as one might expect in what is essentially a collection of blog posts. Watching these smart folks kick the idea around, the reader might be tempted to interject a simple question: Why is "creative capitalism" even necessary? Whatever its limitations, no economic system has done more to create wealth, drive the progress of technology, improve the world's living standards and reduce poverty than capitalism in its traditional form. Maybe what the world could really use -- especially in its poorest regions -- is not "philanthro- capitalists" but just more plain old profit-seeking ones.