The Challenges of ‘Creative Capitalism’

Few ideas are as widely held among philanthropists as the view that the failings of capitalism are what make their efforts — and those of government — necessary. And few notions have been more widely accepted among corporate leaders than that the business of business was to do business — and leave charity outside the boardroom.

In a speech last week at the World Economic Forum, in Davos, Switzerland, Bill Gates questioned both these views. Capitalism, he argued, could provide immense help to the needy, especially in the world’s poorest countries. Government and philanthropy, in turn, could make businesses more successful.

Although those ideas are not exactly novel, coming from an iconic business figure who is about to become the full-time head of the world’s richest foundation ensured that such seemingly heretical thoughts would get attention. But less certain is how Mr. Gates intends to grapple with the challenges of the “creative capitalism” he outlined in Davos. Businesses will have to work hard to develop ways to help the needy, and philanthropy and government will have to look at the poor in a new light, as customers, not clients.

To be sure, for a decade or more, a small but influential segment of the philanthropic world has been insisting that nonprofit groups ought to take lessons from business. The Ford Foundation has even gone so far as to choose a business consultant, with little previous experience in philanthropy, as its new president.

Meanwhile, growing numbers of business executives have embraced, as part of their corporate strategies, “socially responsible” practices that include traditional philanthropy and volunteering as well as other new approaches, like solving environmental and health problems. Just the week before Mr. Gates delivered his speech, Google announced an ambitious mixture of foundation grants and financial investments that focused on issues that have long preoccupied philanthropy, like how to foster renewable energy and prevent the spread of infectious diseases.

What makes Mr. Gates’s speech significant is only partly that his resources — through both the Bill & Melinda Gates Foundation and Microsoft, whose board he will continue to chair even after he leaves his full-time job at the company — vastly surpass those of anyone else. Perhaps more important is his endorsement of the value of market forces for producing far-reaching, long-term social change.

At Davos, Mr. Gates noted that “capitalism harnesses self-interest in helpful and sustainable ways” by providing goods and services to those who can pay for them. But it falls short in making its products available to those who cannot afford, but might need them.

Donations and other forms of philanthropy can help somewhat, he said. However, his own experience at Microsoft suggested they cannot do enough nor are they likely to be a reliable source of support.

A better solution, Mr. Gates argued, would be to give companies financial incentives to see the needy as potential customers. By developing products designed to solve the most serious social and health problems that the world’s poor face and making them available at affordable prices, businesses could, in theory, do well for themselves, while also doing good for others.

Instead of relying on gifts or aid programs chosen by philanthropists and governments, the needy would be able to purchase what they most needed. Among the examples Mr. Gates cited were his own company’s efforts to make computer technology more accessible and the actions by pharmaceutical companies to manufacture low-cost vaccines for diseases like malaria and tuberculosis.

In Mr. Gates’ view, government and philanthropy still have important roles to play.

In addition to supporting economic and social programs, governments could ease restrictions that prevent markets from operating, like trade barriers to exports by African farmers and regulations that increase the price of new drugs. Likewise, by underwriting the costs of developing and distributing products needed by the world’s poor, philanthropists could enable markets to better function.

A good deal of this, of course, has already been going on. Governments everywhere have been liberalizing their economic policies and, along with private grant makers, devoting more resources to the problems of the world’s poor. And for many years, companies have been searching for ways to reach potentially lucrative markets in developing countries. (Mr. Gates cites C.K. Prahalad, a University of Michigan business-school professor of strategy, whose 2005 book, The Fortune at the Bottom of the Pyramid, urges businesses to look at the poor as consumers, not objects of charity.)

“Social entrepreneurship” — a phrase that Mr. Gates associates with “creative capitalism” — has become a buzzword at major business schools, and leading practitioners, like the Grameen Bank’s Muhammad Yunus and Ashoka’s Bill Drayton, have acquired the status of modern-day heroes.

Yet, some cautions are worth keeping in mind as well.

One is that it is generally easier to talk about profitable social ventures than to establish them. Even with generous subsidies, some products and services will be difficult to provide at a price the world’s poor can afford. Despite whatever sympathies Mr. Gates (with a bow to Adam Smith) believes corporate executives might harbor for the plight of the needy, their actions will ultimately — and properly — reflect business calculations, where simpler and more-lucrative opportunities will usually be preferred to riskier ones.

Furthermore, at least to some, the market is not always suitable for everything that could be marketed.

Although most of its grant making is focused on global health and development, the Gates foundation also sponsors a major program aimed at improving American schools. Yet, like most education grant makers, it has been wary about underwriting market-based approaches to schooling, like vouchers and, to a lesser extent, charter schools. Doing so would invite opposition, not least of all from public-school officials, who believe that education is too important to be left to businesses or private nonprofit groups. “Creative capitalism” requires a willingness to challenge orthodoxies, as well as devise new kinds of financial incentives.

It also requires acknowledging that the customer, if not always right, has preferences that producers have to respect. This may not come easily to philanthropists or government officials, whose efforts are often based on their own understanding of what ails the world. Yet for markets to work well, people have to participate willingly in them, which means they must be offered goods or services they want, not just what others think they need.

Mr. Gates began his Davos speech by declaring himself an optimist about the state of the world and attributing the improvements that have occurred over recent decades to capitalism. How well he can apply that insight to his philanthropic pursuits remains to be seen.

Leslie Lenkowsky is a professor of public affairs and philanthropic studies at the Center on Philanthropy at Indiana University and a regular contributor to these pages. His e-mail address is llenkows@iupui.edu.