IRS figures show the number of 501(c)(3) charities surpassed 1.2 million in 2009 . There are another roughly 500,000 charitable organizations that don’t have 501(c)(3) tax status. The number of nonprofits actually doubled between 2002-2007 . Over the past few years 501(c)(3) organizations have been increasing at a rate of about 40,000-45,000 annually.

The largest source of nonprofit revenue comes from dues, fees and related charges (38%), followed by government support (31%), private contributions (20%) and “miscellaneous revenue” (11%). While the number of nonprofits continue to grow, over 50% of the revenue sources they rely on comes from two dwindling sources of support; diminished private giving and government grants in the face of the largest deficit in US history, (despite a short term “surge” as part of the stimulus package).

Related to private donations, of the 1 million 501(c)(3) organizations, about 120,000 of them are philanthropic institutions. The ratio of nonprofits to philanthropic institutions that support them is roughly 13:1 and growing. Half of these philanthropic donors have assets under 1 million dollars and two thirds have assets under 10 million. Only about 6,000 philanthropic funders have assets over 10 million dollars and they account for about 85% of *ALL* philanthropic assets to support over 1.5 million nonprofit entities. The good news is that giving by private philanthropies represents only 16% of all support. The bad news is that total philanthropic giving by individuals, corporations and foundations was down by 5.6% in 2008 and by another 3.6% in 2009.

Nonprofit does not necessarily have to mean non-sustainable. The difference between nonprofits and for profits is that the former invest all their revenue back into their programs instead of distributing them to their shareholders. Nonprofit stakeholders are actually like shareholders except that they receive “dividends” through the quality services they receive by savvy nonprofits that can reinvest in themselves. 

Unfortunately, aside from dues and memberships, only 11% of nonprofit income comes from other sources of revenue. In the best of times nonprofits have difficulty raising funds to support their administrative operations. These are not the best of times. This era of diminished funding provides an excellent opportunity to begin thinking about generating revenue in new and innovative ways as the economy continues to mend – by setting values and charging for some of the free products and services nonprofits provide in order to better support themselves and their operations.

Some in the sector may consider this heretical but the objective statistics clearly show that long term dependence on fund raising in an increasingly crowded nonprofit field is unsustainable. Moreover, in our consumer-based society people have become used to valuing products and services based on their pricing. Free is not always considered better, and people will pay for value if the benefits to them are clearly demonstrated. Nonprofits actually have an advantage in this area. They can not only demonstrate individual constituent benefit but often the greater value of their offerings to society as well.

In the traditional philanthropic relationship, foundations act as resourcers and nonprofits as implementers. The two are dependent on each other to get the job done. Contrast this with a private or public center entity which resources and implements its own projects from its own revenue sources. The problem in the modern philanthropic resourcer-implementer relationship is that both have slightly different mission objectives. The nonprofit focuses on meeting constituent demand. The foundation focuses on selecting the nonprofits it perceives will best meet its mission objectives, which it defines though its grant criteria. The foundation’s focus on selecting nonprofit implementing partners is already one step removed from serving actual constituents, and its grant criteria may or may not reflect actual demand. Consider the outcome when an architect (the grantor) and a builder/contractor (the nonprofit) both have a slightly different vision of the end product they support and neither can complete it without the other. A tangible example of this metaphor exists: The Twin Towers collapsed in New York almost a decade ago, and a gaping hole has existed in the ground for much of the decade since. Similarly, many of the problems funders and nonprofits tackle have existed for decades and grown even more complex.

What has caused this “division in vision” and how does it affect the way philanthropy operates?

At the start of the modern philanthropic movement a century ago institutional donors supported a handful of nonprofits addressing major social issues. Identifying “the right” nonprofit handling an issue best was far less complicated. Philanthropic grant criteria focused on vetting the strength of the few entities that existed and supporting their missions. With fewer nonprofits meeting the need, selected charities could also rely on long term funding to support their administrative operations. Fast forward a century with almost one million registered nonprofits, another half million identified charities and about 45,000 new nonprofits starting each year, according to the Urban Institute. Foundation gate keeping has gotten far more sophisticated, and in the process has changed the nature of the foundation-nonprofit relationship. Traditional philanthropy is still based on resourcing the right institutions to meet a mission objective. The difference is that identifying these institutions has become a full time job.

Many philanthropies now create their own complex set of program criteria to define their objectives and insure that their finite amount of resources are limited to a manageable subset of potential partners before requesting proposals. Grant criteria are sometimes determined by a funder before real demand in the field is even assessed. The result is that grantees are expected to meet the philanthropic institution’s mission objectives before receiving support rather than demonstrating why their mission goals and constituent needs warrant support as the main determinant. The successful modern grant proposal is often a study in effectively subordinating the nonprofit’s mission objectives, and instead making the case for why its activities perfectly match the mission of whatever philanthropic institution it is requesting support from. The practical effect of meeting foundation missions first is that the nonprofit acts more like a subcontractor to the philanthropic grant giver than a gift recipient meeting its own needs. Moreover, funder initiatives often last only a few years before changing, and with so many grantees, few can expect long term support to build their capacity.

Unfortunately, the philanthropic relationship is still perceived by both sides to operate as it historically has. Many philanthropies still consider the grants they give with strings attached as outright gifts to support nonprofit missions rather than appreciating they have evolved to meet their own mission criteria first. Many nonprofits also act as if the grants they receive are outright gifts. Consequently, they grumble about grantor requests for metrics being overly burdensome and wonder why these supposed gifts don’t support their real needs, which include administrative costs to allow for healthy operation and institutional growth. This gap between perception and reality causes much of the dysfunction in the relationship as the separate nonprofit and philanthropic missions compete for dominance. The unacknowledged subcontractor relationship has continued for many years because of what a funder colleague dubbed “the Dance of Deceit”. Here are its steps:

Differences in mission are purposefully underplayed when the nonprofit applies to meet the funder’s criteria to win a grant. Once the grant is won, the nonprofit applies the funds to meet its mission goals and constituent demand. When reporting back, it then retranslates actual use of the funds into satisfying the funder’s criteria. This process is an open secret and has allowed the subcontractor relationship to tacitly operate because philanthropies are typically less focused on how the nonprofit implements its grant and more on the processing required to initially win the grant. Grant selection is a full time bureaucratic process in many philanthropic institutions. A combination of grantees reporting back what grantors wish to hear and often self-serving grant evaluation processes allow grantors to declare mission success. However, the system has started to show strains over the last decade because the chorus to really demonstrate donor and nonprofit accountability and grant impact has grown, exposing the reality of the relationship and its limitations in trying to satisfy two institutional missions.

To address the problem systemically and pull philanthropy into the 21st century the issues cannot be addressed from either the funder or nonprofit side exclusively, but rather by changing the nature of the collaborative relationship between them. The best examples in the Disrupting Philanthropy report speak to addressing philanthropic issues through information sharing, collaboration, smarter investment and metrics that better measure outcome and impact… None of these are new, but they all speak to addressing the issues by focusing on constructive, open, and honest nontraditional relationships between philanthropic institutions and nonprofits. The new ingredient in all this is a highly networked world with technology that promotes collaboration and the ability to create solutions to address this relationship in new and effective ways.

In fairness to the philanthropic sector, there is an extremely competent TAG group affiliated with the Council on Foundations whose membership primarily includes the administrative IT staff of medium and large foundations. The Council on Foundations undertook an effort last year to identify the priority issues facing philanthropy in the 21st century on a broader programmatic scope — an effort I was also a part of as a consultant. A paper was produced and is now being actively promoted to its membership, and more broadly to make philanthropies aware of the priority issues. What will come of the effort implementation-wise is a work in progress. However, it’s telling that the number one identified priority was the simple application of standard data fields and taxonomies to the grant application and reporting process. It’s a process similar to most foundations requesting input from grantees, but made highly unique and over-complicated because philanthropies in aggregate still spend millions if not tens of millions of dollars to develop their own unique grant tracking systems and processes.

Despite the downturn, many philanthropic institutions still have the money to spend on technology, and many are using it to benefit their back office processing. Too much money is not always a good thing however, when it spurs development of unique, traditional, one off solutions. There are a number of additional reasons to explain the dichotomy of resource-poor nonprofits making the most of cutting edge technologies to effectively support their program missions while philanthropies lag in this area:

• Ironically, an issue that has always been a challenge to nonprofits – high turnover and low salaries — is now an advantage in the area of technological innovation. Young people at the start of their careers continue to populate the nonprofit workspace. The difference now is that they were weaned on social networking technologies and ubiquitous, affordable consumer devices and it is a part of their communication DNA. By comparison, philanthropic staff tend to be one to three generations older and not as familiar/comfortable with the new technologies or their application.

• Behaviorally, the new technologies work for the nonprofit and against the traditional philanthropic organizational culture. It’s the nature of nonprofits to reach out, engage and network with their constituents and the current set of online technology tools are specifically designed for this purpose. By contrast, traditional philanthropy creates a firewall between itself and its grantee, limiting outreach and social networking with constituents.

• The affordability of current technology cannot be overemphasized. The historic barrier to nonprofit access of these tools was financial, both in terms of the tools and the trained personnel to use them. There now exists a ubiquity of useful web applications, from surveys to online solicitations — including specialty applications for nonprofits like advocacy and human rights. Nonprofits and philanthropies both like to think of themselves as unique, but the former has been far more inclined to use standardized affordable technology than its philanthropic counterparts who still have the resources and inclination to build unique solutions.

It is both inspiring and a healthy evolution of the sector that nonprofits now have the access, impetus and personnel to apply the new technology tools. What is distressing is that their philanthropic counterparts still lag behind in their understanding and use of these same tools. Philanthropy in the 21st century is being reshaped by online networked technologies and new types of philanthropic initiatives. witness the Iranian post-election crisis and Haiti relief. It’s incumbent for traditional philanthropy to get ahead of the technology curve if it doesn’t want to become a historic artifact of the 20th century.

For a list of nonprofit actors spurring technology use among nonprofits see:

eRiders - Mission Driven Technology Support for Non Governmental Organizations.
Idealware.org - For the latest review of said tools.
Netsquared.org challenges website sponsored by Techsoup featuring the latest cutting edge applications for the social sector and other similar challenges.
NTEN.org – Nonprofit Technology Conference and website.
Socialsourcecommon.org - A social network of nonprofit software tool users sharing their favorites.
TechSoup - The largest International distributor of software to the nonprofit sector.

Contrast grants and their donor-imposed program criteria and limitations on overhead expenditure with pure donations given to nonprofits based on a request for support or a self-defined need. Donations are also intended for program use, but can satisfy general support and overhead needs as well. Metrics are not attached to donations as a prerequisite to receiving funds although a number of 3rd party entities like greatnonprofits.com, charitynavigator.com, etc. measure and assess nonprofit efficacy and efficiency. The difference is the onus is on the nonprofit to use and report on donations it gets wisely after they have been received.

Grants and donations are technically both gifts but they have very different meanings and foster different perceptions and behaviors.

Websters online defines the noun donation as:
- Making of a gift especially to a charity or public institution
- A free contribution

It defines the noun grant as:
- Something granted; especially: a gift (as of land or money) for a particular purpose.

So both are gifts, but by definition grants have strings attached, while donations don’t.

My philanthropist friend pointed out, “Donors typically use grants and gifts interchangeably”. I agree, and in my experience in the sector, nonprofits typically equate donations and gifts. The result is that when granting institutions and nonprofits use the word gift, they have different perceptions of what that term means. To a donor it’s perfectly reasonable to give a gift with strings attached that first must meet its goals (a grant). What the nonprofit expects is a gift with no strings attached to meet its goals (a donation). The interchangeable use of these two terms as gifts creates perceptual dissonance in the way nonprofits react to grant-imposed requirements like metrics. Nonprofits assume all gifts are designed to meet their mission and operational goals. Grants just seem to have those additional pesky requirements that must be satisfied or at least paid lip service to.

Granters perceive grants as they are defined; gifts for a particular purpose with requirements to meet — specifically their program goals and measurements. Many nonprofits actually have to massage their goals to meet granter criteria before they can receive their “gift”. My philanthropist friend pointed out that “Some donors attach strings to grants and others don’t”. If donors are giving gifts with no strings attached then these “free contributions” as Webster defines it, are actually donations and not grants. In these instances, both donors and nonprofits have the same understanding of a gift. Unfortunately, what is actually a donation is mislabeled a grant, because the lawyers say that’s how it must be structured.

More typically however, grants have one or more of these characteristics and reflect a donor’s perception of a gift but not a nonprofit’s:

• They must first meet donor program funding objectives before being provided
• They have prerequisite criteria attached to them before the nonprofit receives funding.
• They have strict expenditure requirements/limitations.

Nonprofits benefit from grants — through a symbiotic relationship that hopefully accomplishes their goals after meeting the granters. Granters might wince at this description because they try to do the right by gifting to nonprofits. However, if nonprofits must first modify their goals; meet granter criteria to receive funding; and are restricted from applying funds to meet their capacity needs; it’s fair to say they are meeting granter objectives before their own.

It’s the difference between giving your kid a toy you know he’ll love because it’s what he wanted and giving your kid a toy that you feel will suit him best based on your idea of an appropriate toy. Yes they are both gifts, but the intent differs, and in your generosity you are meeting your needs first – otherwise you’d just give the little darling what it wants. Meanwhile junior is happy he got a toy – but it’s not exactly what he wanted, and why is that [thinks junior] if you were already generously giving out toys?

My philanthropist friend referred to a “Dance of Deceit” that occurs when nonprofits and granters engage in negotiations that knowingly bend grant criteria rules. The steps involve granters finding loopholes around their criteria to satisfy real need and nonprofits reclassifying overhead costs as program expenditures so they can use funds as if they were unrestricted donations. The dance of deceit allows both sides to feel the granted gift functions more like a donated gift.

Unfortunately, to make grants feel like donations, both sides engage in variety of dysfunctional activities that are open secrets in the sector. How else can one rationally explain the “Dance of Deceit”; or focusing on a nonprofit meeting criteria during grant processing, but not following up to ensure it has during implementation; or nonprofits reporting back their expenditures in the right buckets by juggling a variety of income sources and using creative accounting to make the numbers work; and finally that old favorite, the self-serving evaluation that allows both granter and nonprofit to declare success whether real or imagined.

The sector would be better served if all parties acknowledged the difference between donations and grants and whom they are primarily designed to serve. Expectations would be more realistic on issues like capacity support and metrics. For example, we might ask, “Is the nonprofit sector better served by individual targeted program grants with prerequisites success metrics, and do they really foster broader efficiency and efficacy in a nonprofit; or are donations better at meeting these needs, with objective third party institutions applying general efficacy and efficiency metrics across the sector?”

One can make the argument that individual generations are defined by their emerging technologies — the ones that separate them from their fuddy-duddy parents. However, while Web 2.0 may define the millennial generation, different generations inevitably use the same tools differently based on formative experiences with technologies of their own generation.

The millennial generation has defined its social interactions around interactive Web 2.0 technologies like Twitter and Facebook – and they also accomplish specific objectives with these tools like electing progressive leaders of the free world and contesting elections in repressive regimes. By contrast, my generation, who currently occupy strategic management positions in many nonprofits and philanthropies, were raised on broadcast technologies like MTV that informed our socialization. We read newspapers and watched content on at pre-existing times on TV, (not 24/7 on mobile devices). We were amazed at how transformative e-mail was and it remains our core technology. Privacy seems a useful if not quaint notion to this generation as long it doesn’t interfere with their online social interactions. By contrast, my generation winces in horror at sharing personal information online. Do one billion Internet users and potential employers really need to see images of us being stupid at a Christmas party, we ask?

So it’s not surprising that my generation often perceives the utility, but not the necessity of incorporating these Web 2.0 tools as indispensable components of our core social interactions. Why should we? We actually grew up without them and by some miracle maintained close ties with friends and family – all without a single tweet!

Personally I “tweet” almost every day, but not because I want anyone knowing what I am doing 24/7 (god forbid). Nor do I want to know the whereabouts of a few hundred of my closest friends. I tweet a message a day on news topics of relevance to strengthen my ability to present complex arguments or concepts in 140 characters or less – to really interact electronically I use e-mail and occasionally instant messaging. Sometimes I even use a phone — with real wires attached.

What does this say about older technologists and nonprofit managers, new technologies, and the future of their successful deployment in foundations and non-profits? We’re all cognizant of the mad dash to apply these tools to every form of philanthropic and nonprofit endeavor. To stay pertinent, CNN has become a continuous advertisement and guilt trip for the use of social networking tools, (their unspoken motto: “We tweet therefore we are… relevant”). In the process they have unfortunately conflated staying perpetually informed and socially networked as one in the same concept. If you are not following this or that anchor on Twitter, you must be a flawed or damaged human being. Most “older folks” over thirty-five or forty, have real issues with this. I readily acknowledge some in the over thirty-five crowd completely hip to social networking who live and die by this or that tool. For the rest, I say “Relax, you’re not completely out of it, you’re not flawed in some way and most importantly, you’re not alone. You are simply part of a different generation…. Accept it.”

With acceptance comes healing… While you may not use the technology the same way, or appreciate why sending virtual seeds and cookies through Facebook is at all relevant to your existence; it is still incumbent on you to appreciate how these tools are used effectively. Listen to those young whippersnappers and then apply your wisdom of experience to adapt it to the strategies and objectives of your organization. Defer to younger colleagues with really interesting and intuitive suggestions for applying social networking in ways you would never even consider… You don’t have all the answers because you didn’t grow up with these tools. Don’t be intimidated by someone half your age who knows better about using and applying these tools to their generation than you do. If you learned a second language in your 40’s and came across a twenty-something that speaking same far more fluently and without accent, would you be surprised? Same difference. You don’t have to use or understand the tools in the same way as younger colleagues. You do have to be open to their adoption and new ways of operating with them, utilizing the talent and experience of those younger colleagues.

Ironically, nonprofit’s are in a far better position than philanthropies. For once the rapid turnover and often younger staff who populate them come to the job with social networking in their DNA. Philanthropic turnover is far lower and decision-makers are often 2-3 generations removed from the latest technologies. It is incumbent on these decision makers to listen to younger tech-savvy staff and nonprofits they fund for guidance. The relationship is symbiotic; nonprofits need philanthropic support for these initiatives. Philanthropies with questions that lack in-house expertise can turn to a variety of excellent third party non-profit technology support providers including Npower.org, Techsoup.org, Aspirationtech.org to name a few.

Finally, to my aging peers, take heart… Those twenty-somethings will be forty and fifty-somethings soon enough and they will deal with the same issues of a newer generation’s technologies. I’m hoping to retire before tech-implants become the rage…

Jonathan Peizer is the former CIO and Director of the Open Society Institute’s Global Internet Program and currently President of Internaut Consulting, providing strategic and technology advice to philanthropies, nonprofits, and governments. He is the author of the book, The Dynamics of Technology for Social Change as well as numerous articles on philanthropy, technology, nonprofits and organizational capacity. He is founder and Board chair of the NGO Aspiration, and developed the peer-reviewed non-profit capacity resource, Capaciteria.org and the socially responsible eCommerce Enterprise Greentealovers.com.

Management is an art form, and a field of expertise. You may get a degree in it, but like the military, the best managers are often forged on the front line and mentored by other more seasoned professionals. The point is it requires a set of skills (logistical, critical thinking, organizations, advocacy, people skills, etc..). Whether these skills are obtained in the classroom or through experiential mentoring one should not assume that being smart means being a good manager, knowing it all and not needing to seek out expertise to hone skills in this area further. Otherwise the term *honorary manager* is the more applicable moniker to put on one’s business card.

Good management is often counterintuitive to the human defense mechanisms we use in other life contexts. A smart person who falls back on these personal traits instead of the objectivity, human and organizational skills one needs to be a good manager often leads to poor management practices, very demotivated staff and poor performance.

20 Tips Every Strategic Grant Seeker Should Know is written for every grant seeker wanting to do a better job of translating their passion into successful grants or who have walked away from donor interactions wondering what they were thinking. It explores the key issues from a grant maker’s perspective, providing grant seekers insight into the dynamics of the donor decision making process and the reasoning behind it. Most importantly, it lays out successful strategies to leverage these dynamics. The twenty-four page guide is written in very practical terms. Each page describes a distinct donor behavior or practice, a brief description of why it occurs, its effect, and most importantly a strategy for the grant seeker to leverage or avoid it. I think it’s a very useful and timely guide for difficult economic times and is based on my experience on both sides of the table and in the sector over a couple of decades. Expect at least a few “A-Ha” moments as you read the tips and accumulate insight into donor behavior you may not have considered.

You can access this free publication at http://grantseekersedge.org or http://20grantseekertips.org

As the first entry of my new Tea & Strategy Series of publications this free offer is being coupled with another, discounted offer to promote both knowledge and a healthy, greener lifestyle.

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

What I’ve not done is to necessarily argue the point. The recent shooting at Virginia Tech illustrates when the online culture actually draws people closer to each other — in circumstances where they were not connected at all to begin with. Many of the people who were victims had their own facebook.com and myspace.com sites and traditional media picked up on this early to define the victims not in terms of statistics (30+ killed) but as human interest sound bites. However, if you spend more than 30 seconds reading these profiles written in the victims own words before they ever knew they would be victims, you get a better sense of them as human beings — their likes, dislikes, personalities, personal thoughts and pictures – as well as their many friends who use the virtual space these victims created as memorials to murdered human beings they want others to know better. I can’t think of anything more empathetic or humanizing… and it’s a microcosm of what’s happening online in many instances — people writing about events and describing themselves in the context of events happening all over the world. Unfortunately it takes these significantly terrible events like wars, assassinations and random murders to draw attention to the phenomenon of “virtual humanization” of those whom we would otherwise empathize with only in the abstract, as statistics, because we know nothing about them otherwise.