23 February, 2009Issue 8.5EconomicsPolitics & SocietySocial Policy

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Fair-Weather Ends

Elizabeth Kelly

creativecapMichael Kinsley
Creative Capitalism
Simon and Schuster, 2008
336 pages
ISBN 978-1847374103

In January 2008, Bill Gates told his fellow cash-flush capitalists at the Davos World Economic Forum that the free-market system, which had made them so successful, now needed to be “refined”. “The world is getting better, a lot better,” Gates said, but the “bottom billion” is being left behind. The solution he offered was a reprogrammed Capitalism 2.0 that would improve the lives of the world’s most disadvantaged, using profits where possible and another market-based inducement—recognition—where not. Gates dubbed his idea “creative capitalism”, a “hybrid engine of self-interest and concern for others” that would serve “a much wider circle of people than [could] be reached by self-interest or caring alone”.

In January 2009, few at Davos would have said that the word was “getting better”. Many thought capitalism did not need to be “refined”; it needed to be overhauled. Gates acknowledged at the summit that his philanthropic foundation had lost a fifth of its value. But has Gates’s “creative capitalism” proposal lost its value too? (Will “creative capitalism,” like Windows, reinvent itself for a new era? Or will it go the way of Microsoft Bob, a Gates idea that turned into a fantastic flop?)

Magdalen College alumnus Michael Kinsley thinks that Gates’s notions are still relevant. (He would. His wife was a Microsoft executive before she became CEO of the Bill and Melinda Gates Foundation, a position she has since left. Kinsley also founded the online magazine Slate in 1996 with seed money from Microsoft.) Kinsley’s new book, Creative Capitalism (2008), is a creative capitalist strategy in its own right. Kinsley convinced 40 public intellectuals—including three Nobel laureates and two former US cabinet secretaries—to contribute comments to a blog. He then packaged those comments into a hardcover book and put it on sale for ¬£16.99, with the advance payment from Simon and Schuster distributed among the authors based on the number of words they contributed to the volume.

Whatever their disagreements, all the contributors generally esteemed the power of conventional capitalism. The difference was that enthusiasts of “creative capitalism” wanted to use free-market forces to solve problems typically left to governments and non-profits, whereas skeptics thought capitalism should be left alone to spread prosperity (and where capitalism fails, government and non-profits should pick up the slack.) In the light of the recent economic crisis, neither alternative seems particularly appealing. Now, as Kinsley admits in his introduction, “the notion of letting capitalism loose seems as appealing as letting loose a pack of rabid dogs”.

Altering capitalism for the betterment of the world’s poorest doubtless sounds even less appealing to CEOs. Under creative capitalism, big, global corporations would integrate doing good into doing business. But for many companies, doing business currently means just staying solvent. By Gates’s logic, adopting creative capitalist approaches could aid in that effort to remain in the black. Corporations, he claimed, could improve the world and their own bottom lines by investing in underdeveloped markets. Furthermore, by acting in a socially responsible fashion, companies would generate recognition that would enhance their reputations, attracting both customers and employees and presumably producing profits.

But according to economic logic, if catering to developing countries and doing good deeds for recognition were profit-promoting, they ought to be common practice already. Furthermore, if recognition, not altruism, were the goal, corporations would be unlikely to invest in projects with real value if they could generate similarly good public relations from less expensive and less risky social investments. (This was the reality encountered by proponents of “Corporate Social Responsibility”, the mantra of the moment before “creative capitalism” came along.)

Gates is essentially urging business to surrender some profits to do good works. At best, Gates’s logic only applies to industries with considerable profit margin; almost no one has a considerable profit margin right now. Such sacrifices seemed a questionable idea for companies in early 2008 and sound positively suicidal now. Regardless of the economic times, firms that stray too far from maximising profits might lose significant revenues and perhaps get taken over by more ruthless competitors, causing layoffs at a time of record unemployment.

Even former US Secretary of Labor Robert Reich (University College alumnus), who maintains that social responsibility and profit-maximisation ultimately coincide over the long term, argues that creative capitalism is doomed if it requires corporations to sacrifice profits (or share price) in the short term. As Reich acknowledges: “From the standpoint of the modern firm, the long term may be irrelevant.”

Given the current climate, stockholders are unlikely to feel any more warmly towards creative capitalism than do CEOs. Having watched their portfolios decline precipitously thanks in part to the “innovations” of profit-hungry executives, they seem unlikely to encourage further innovations, even those for the public good. Matthew Bishop, an editor at the Economist (and Jesus College alumnus), argues that stockholders might be open to creative capitalist strategies if companies are “transparent about what they are doing and compete for shareholder approval”. Companies can win shareholder approval, he says, by portraying social investments as examples of “enlightened self-interest”, emphasising that the investments will turn a profit in the long run.

But as Obama economic adviser Lawrence Summers points out, by considering ends other than profit maximisation, creative capitalism entails a loss of accountability with regards to executive performance. “The sense that the mission is virtuous is always a great club for beating down skeptics,” he writes. Stockholders are unlikely to cede such accountability and would more probably agree with Reich: “The only legitimate reason for a corporation to be generous with its shareholders’ money is to burnish its brand image, and such a rationale will only go so far.”

With their own pockets comparatively emptier, stockholders will presumably demand that companies pursue profit maximisation exclusively, perhaps even going so far as to classify giving to charity without expecting a commensurate profit as a corporate misuse of funds not unlike the lavish retreats and expensive carpets currently being lambasted in the news.

Presumably the population most likely to continue supporting creative capitalism is that which is most likely to benefit—the world’s poorest. But the scheme is not without risks even for these individuals. Creative capitalism could even backfire and actually hamper life chances for the world’s poorest. Through its employment of productive workers, capitalism can lift individuals and nations out of poverty. But capitalism makes its greatest contributions unencumbered, and pursuing altruism as well as profit would hamper it by jeopardising corporations’ efficiency, the very thing Gates wants to channel for the public interest. Corporations are so efficient in part because they single-mindedly pursue profit maximisation—an advantage that would be lost were they also pursing altruism.

All of this to say that we should not expect any creative capitalist innovations anytime soon. Gates’s speech and Kinsley’s book are more valuable for the discussions they have generated than for any changes they are likely to bring about in the near future. Corporate donations have already declined since late 2007, indicating that cash-strapped corporations feel charity is a luxury they currently can ill afford.

More appealing to them now is the view espoused by the late libertarian economist Milton Friedman: “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” The test of Gates’s ideas will be if they resurface when the Dow does.

Elizabeth Kelly is reading for an MSc in Comparative Social Policy at Green-Templeton College, Oxford.