Robert Barro: Bill Gates' Charitable Vistas

Charitable giving seems to be the topic of the day. Here, Harvard's Robert Barro is unimpressed with Bill Gates philanthropy:

Bill Gates' Charitable Vistas, by Robert Barro, Commentary, WSJ: Bill Gates ... earlier this month collected an honorary degree from Harvard University. ... In collecting his degree, Mr. Gates delivered a commencement address that focused not on the information age, the rise of personal computers or the relentless efficiency his software has brought to nearly every industry. Instead, he focused on his own personal philanthropy. His implicit theme was that so far what he has accomplished may have been good for him and Microsoft shareholders, but it has been no great contribution to society. He suggested that with a personal fortune of about $90 billion ... it is time for him to give something back.

I find this perspective hard to understand. By any reasonable calculation Microsoft has been a boon for society and the value of its software greatly exceeds the likely value of Mr. Gates's philanthropic efforts.

Here is a sketch of a simple model of Microsoft's social value. ...

In 2006, its revenue was $44 billion, with earnings of $13 billion. This money was generated by creating something consumers value. ...

Suppose that a copy of a new version of Windows sells for $50 (and is typically charged as part of the price of a personal computer). Microsoft's revenue from Windows would then equal $50 multiplied by the number of copies consumers snap up. ... But that's not the social value. That comes from the increase in productivity created when businesses and households use the software. The social benefit equals the value of the extra product, less the total paid for the software. Almost by definition, the benefit has to be positive. Otherwise, why would consumers willingly pay for Windows?

A conservative estimate ... is that the social benefit of Microsoft's software is at least the $44 billion Microsoft pulls in each year. When capitalized with the same ratio (22) that the market applies to earnings, this flow corresponds to a valuation of $970 billion. Thus, through Microsoft's future operations, Mr. Gates is creating a benefit to the rest of society of about one trillion dollars -- or more than 10 times his planned donations. And this counts only the likely future benefits, giving no weight to the past.

Mr. Gates has pointed out that it's difficult to give away such a large sum of money in a productive way. ... Mr. Gates's plan is ... to use the Bill and Melinda Gates Foundation to reduce world poverty, with an emphasis on advances in health. This is a noble goal. But it will likely just supplement the much larger existing programs ... that have been carried out for many years by international organizations and governments. These programs have, at best, a checkered record. Although Mr. Gates is probably smarter and more motivated than the typical World Bank bureaucrat, he likely won't do much better.

To find policies that are likely to alleviate poverty, it is best to look at actual successes and failures. In recent decades, the biggest single accomplishment is the post-1979 (post-Mao) economic growth in China. ... The second-best story is the economic growth in India...

Also illuminating is the greatest tragedy for world poverty -- the low economic growth in sub-Saharan Africa. In this case, the number of people in poverty rose by around 200 million from 1970 to 2000.

These examples suggest that the key question for poverty alleviation is how to get Africa to grow like China and India. An important clue is that the triumphs in China and India derive mainly from improvements in governance, notably in the opening up to markets and capitalism. Similarly, the African tragedy derives primarily from government failure. Another clue is that foreign aid had nothing to do with the successes and did not prevent the African tragedy.

One reason for this is that foreign aid is typically run through governments and, thereby, tends to promote public sectors that are large, corrupt and unresponsive to market forces. Perhaps the Gates Foundation will run more efficient aid programs than we've seen in the past, but I wonder. ...

Of course, Mr. Gates is free to do what he wishes with his $90 billion. But I think he is kidding himself if he believes that the efforts of the Gates Foundation are likely to provide society anything like the past and future accomplishments of Microsoft...

Another calculation that can be carried out, but wasn't, is how much society has lost from Microsoft exploiting its market power.

On the charitable giving part, the question isn't how much social value Microsoft will create in the future, that will be pretty much the same no matter what Bill Gates does with his 90 billion. The question is, given that the goal is to reduce world poverty and improve health, is there is a better way for him to spend this money than through the efforts of the Gates Foundation? Comparing the potential accomplishments of the Foundation's work to the past and future accomplishments of Microsoft is not the correct comparison - giving billions back to Microsoft is unlikely to help achieve the goals of reducing poverty and improving health so that's not the opportunity cost of the charitable giving. Given Barro's criticisms of Gates' plans, I would have preferred that he tell us better ways these billions could be spent in pursuit of these worthy goals rather than using his scarce column space to provide a very rough calculation of Microsoft's future societal value.

Update: Brad DeLong follows up (and actually addresses Barro's main point).