Posted by Jonathan Peizer on January 16th, 2008
A colleague recently sent me this article (below) recently and I just had to comment. Its basic premise is that Bill Gates has done more to advance ’social value’ through Microsoft than he ever will through his philanthropy (despite the fact that even Gates seemingly disagrees with this premise).
The logic that this Economics Professor inhabiting a prestigious Ivory Tower uses to justify his claims is based on the premise that all you have to do is let capitalism reign and social value is created as its byproduct…. because only market forces can seemingly solve all the world’s problems…. This assumes of course that everyone is first and foremost a consumer and not a citizen or a human being.
I think the author is confusing ‘product value’ and the consumers who can afford it with ’social value’ and the many that cannot.
Social value is not intrinsically tied to either products or even cash contributions but to institutions of civil society and rule of law which supports the translation of these things into social value…
A hammer benefits me in the same way that software does if I buy it. And Black & Decker benefits too… But how does that translate to helping the villager in Somalia who is a victim of starvation, poverty or war particularly if he can’t afford to buy that hammer?
If you had a business that was 1/3 successful and the other 2/3rds were abysmal — a write-off — would you call that a healthy business? Yet that is exactly how the “world market” operates under global
Capitalism — 1/3 of the world benefits and 2/3rds don¹t seem too — even with China and India aggressively now in the mix. Don’t get me wrong. I am hardly a socialist — just a realist. So why are 2/3s of the world’s population still living in poverty and why hasn’t that 1 trillion in “social value” the author indicates Microsoft products have created compounded by the many other businesses have also provided to their CONSUMERS translated into a perceptible social metric - also taking into consideration the number of people using Microsoft products without even buying them?
It doesn¹t because the simple assertion of turning product value into social value through product sales is, I think, naive. The argument only holds for consumers who live in appropriately structured societies (with institutions of civil societies and rule of law) that can afford to benefit in the first place. The author makes the point himself using the US as an example in his article rather than far needier places….
The author states: “Mr. Gates has pointed out that it’s difficult to give away such a large sum of money in a productive way. This isn’t exactly true. He could cut a $300 check to everyone in the U.S., or donate the money to the U.S. Treasury with the aim of reducing the national debt. The last method is easier but has different effects on income distribution.”
To the extent MS products are used by socially conscious orgs to resolve issues he has a point… But even here, those who are helped by people using MS products are often NGOS that need to be sustained
by other than business means. But if a poor society does not have the rule of law or strong institutions of civil society and thus cannot benefit to the same extent from purchasing these products do we simply write them off or try to help them in another way– through subsidies? And if you help someone literally survive or get an education they would not otherwise have through these subsidies are you creating more social value or less than little Johnny Jones buying a new upgrade of his operating system?
Using the author’s argument everything has a price and should be defined in terms of social value to consumers — These are just some of my concerns regarding this premise:
1) Is our fourth estate [the media] doing better or worse since the market place
stepped in and decided news had to be either bottom line neutral or show a profit?
2) If you can’t afford to pay in the author’s reality what happens to you in terms of healthcare, education, etc…?
3) Let’s say any American Tech Company and its investors get rich off of putting up an oppressive Internet security net for an autocratic government that nonetheless practices capitalism? Do we hail their productivity gains and the creation of social value in the number of arrested dissidents / malcontents this government decides to label as criminals?
4) In the author’s opinion does promoting a pricey proprietary product like software or drugs at the expense of a low cost/no cost alternative still meet the definition of creating overall social value or serving the greater good?
5) I don’t see anywhere in the author’s calculus that includes the downside of capitalism on the social value equation. Exactly what money are these corrupt governments living off in countries the author’s says philanthropies subsidize poorly with charity? Is it the taxes of all those poor people who can’t afford to pay? Is it really primarily aid? What percentage of this revenue is in fact generated from corporate contracts and kickbacks to corrupt officials in the name of creating consumers or plundering natural resources in the name of profit? Surely the author would agree these realities are antithetical
to creating social value and indeed cancel them out?
Let’s call a spade a spade. Capitalism practiced in its purest form has no conscience. It is designed to maximize the bottom line and shareholder value. Every other objective simply distracts and pollutes this one. While capitalism creates economic opportunities for the population, and thus consumers, it doesn’t necessarily create social value the way a hospital or a library or a cultural institution would — the type of things the Gates philanthropic arm and government invests in by the way.
Any social value that the market or a consumer culture creates is actually a supplementary benefit of a capitalistic process — an afterthought if you will and not the stated bottom line objective. That is probably why the US Founding Fathers, coming primarily from the Merchant Class, set up a sophisticated governmental sector with checks and balances dedicated to serving the public. It’s instructive that what they did not do is hand over the social contract with citizens for local businesses to satisfy…. Nor would I be that particularly comfortable if the Fortune 500 were running my government — although some would argue they already are and that is why we have the problems we do… I am surprised someone like the author who thinks that capitalism creates social value would even focus on it as a significant/important byproduct. Which is why I think he is confusing product value with social value.
Just my opinion of course….
Jun 19, 2007
Wall Street Journal, Print Edition
ROBERT BARRO
Bill Gates is the richest man in the world, helped create a revolutionary computer software company, and earlier this month collected an honorary degree from Harvard University. But he may not
understand the vital role wealth creation plays in society.
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 (including what he has transferred to his foundation) 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. The market value of the company’s stock recently hit $287 billion. In 2006, its revenue was $44 billion, with earnings of $13 billion. This money was generated by creating something consumers value. Only Microsoft’s competitors could believe that this much market value, revenue and earnings would have been created by delivering products that have little value to society.
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. Microsoft’s earnings are the revenue less production and development expenses. 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, in a model where software serves as a new variety of productive input, 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. This isn’t exactly true. He could cut a $300 check to everyone in the U.S., or donate the money to the U.S. Treasury with the aim of reducing the national debt. The last method is easier but has different effects on income distribution.
But Mr. Gates’s plan is, instead, 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 of aid and debt relief 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. Xavier Sala-i-Martin (”The World Distribution of Income,” Quarterly Journal of Economics, May 2006) finds that the number of persons below a standard poverty line fell in China by about 250 million from 1970 to 2000. This massive poverty reduction occurred despite an increase in the Chinese population of more than 400 million and rising income inequality within China. The second-best story is
the economic growth in India, where the poverty count fell by around 140 million people from 1970 to 2000.
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.
Ironically, Mr. Gates’s inspiration to “give back” apparently comes from the world’s second richest person, Warren Buffett, who recently promised to donate much of his fortune to the Gates Foundation.
I say ironic because one can make a much better philosophical case for a give-back of Mr. Buffett’s $52 billion than for Mr. Gates’s $90 billion. Mr. Buffett’s money came mostly from being a good stock picker. Whether his fortune is the product of luck or skill, the social benefits are hard to pin down. These benefits have to derive from improving company management practices or investment decisions.
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. And, frankly, I would have preferred to get the $300 per person “Gates Grants.”
Mr. Barro is an economics professor at Harvard University and a senior fellow at the Hoover Institution at Stanford University
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- I am just not ready to give into a rose-colored panacea that seemingly lulls me into a false sense of who is in charge and the life-changing benefits of a “thing”. Just because a new form of interactive, networked and seemingly grass-roots technology is introduced, we must not forget that however easy, cool and innovative it seems, it is still only a process. Who controls the discussion and subsequent actions using any technology [process] is a separate issue. When the world actually becomes a better place for most people, by a measurable factor, and our control of the Information Age is identified as a significant contributor that helped people make better life decisions — for themselves, their communities and the planet — then i’ll be a true believer. To my mind individual control of the Information Age is justifiable as the “It” thing of the year if it results in the technological equivalent of a polio vaccine - something that makes the world a better place — YouTube, Myspace and the ability to better find, post and distribute stupid pet tricks video clips doesn’t quite cut it — although outing what stupid politicians say on the campaign trail to insure they don’t get elected to do further damage is certainly a step in the right direction 
