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Thursday, February 07, 2008

All's Not Quiet on the Easterly Front

Google isn't the only one coming after Bill Gates, William Easterly sounds his usual theme - capitalism is the answer - to refute Bill Gates recent call for "creative capitalism" to meet the needs of the world's poor that are being overlooked by the market system. I have my doubts about Gates' vision, but I can say the same thing about Easterly's ideas:

Why Bill Gates Hates My Book, by William R. Easterly, Commentary, WSJ: This newspaper reported recently that Bill Gates hates my ideas. I have no hurt feelings... 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 ... thin... 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... 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 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. ... The main obstacles to exports in poor countries are domestic ones like corruption and political strife, not lack of interest from rich-country buyers...

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. ...

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.

William Easterly is no stranger to the editorial pages, and he is often responding with his own brand of snark to some perceived slight or challenge to his development framework. So I find it amusing that he accuses his intellectual opponents of being "notoriously sensitive to criticism." Everyone else is shrill!!!

    Posted by on Thursday, February 7, 2008 at 12:25 AM in Development, Economics | Permalink  TrackBack (0)  Comments (11)

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