Bill Gates’ speech at Davos calls for a greater involvement of capitalists in the fight against poverty, and is rightly concerned about the need to create a structure that can give would-be creative capitalists the proper incentives to apply their energies to the fight. The main driving force he identifies is public recognition. Consumers, employees, and shareholders may all derive utility from the warm glow of being associated with a company that does good things for the world, and they may therefore be willing to pay for it in the form of slightly higher prices, lower wages, and lower dividends.And in many cases no sacrifice is required. Firms spend large amounts of money to sponsor things like car races so as to gain brand recognition, presumably because it makes economic sense. One might imagine that being associated with a sufficiently sexy philanthropic cause could be a just as effective way to advertise. I once heard the CEO of TNT, a Dutch transport and logistics company, make this argument very cogently. He explained why he had decided to stop sponsoring Formula One rallies and instead spend the money helping the World Food Program. His argument was that helping the WFP transport food in TNT trucks would do more to build his brand as one capable of rising to the most complex challenges than would a banner on a racing track. For these two reasons, I largely share the optimism evident in Bill Gates’ speech. Corporations have a unique role to play in producing good things for the world’s poor, and harnessing their power, with public recognition as the currency, seems like the way to go. There is, however, a fundamental difference between producing goods or services to sell on the market, and producing them to improve the lives of the poor. This difference creates a fundamental difficulty for creative capitalism. In their day jobs, capitalists make money and stay in business only because consumers like their products enough to pay a price high enough to allow the capitalist to make money. This ensures that businesses add value on a sustained basis.This automatic feedback loop is generally missing in the social sector, precisely because it is often necessary to intervene in places where the market, left to its own devices, did not, or cannot, arrive at the desired outcome. In many cases, we want to deliver goods or services to people who are unable or unwilling to pay the full price. For example, we may want to subsidise parents to have their children immunised, or have them sleep under bed nets, or have them go to school. These cases suggest that the beneficiaries may be happy to consume such services — even if the services are not worth their costs, and especially if the alternatives are limited. So, unlike the regular capitalists, we have no market-tested guarantee that we are delivering something that is truly valuable.The insight of creative capitalism is that the warm glow of giving can be marketed. But the warm glow runs the risk of being divorced from any actual benefit. What makes a consumer, employee or shareholder feel good is not necessarily what truly helps a poor person.If creative capitalism is to fulfill its potential, it has to resolve this tension. It is important that the benefits of recognition be as closely aligned as possible with social value. One approach has been to focus on identifying areas where a gap between private and social value does not exist, or is sufficiently small. There are many cases where the poor would be willing to pay for a service at full price if the service were to exist. But no one may have offered it yet, or there might be a way to offer it more cheaply or more effectively. Creative capitalists can focus their efforts on offering these types of services, and getting paid for it. After all, inventing new products and ways to sell them is what capitalists are good at. Such ventures generate a lot of recognition currency as well, as evidenced by the spectacular expansion of microfinance and, more recently, the success of Kiva. But it would be a shame if creative capitalists were to focus only on this sort of venture. There are many cases of goods with social benefits that the poor may not want to purchase at full price. Public health interventions are an obvious example: when there are large externalities — everyone in a community might benefit from an individual vaccination — the private value is lower than the social benefits. As a result, requiring ‘sustainability’ in the narrow financial sense (each project must generate enough revenue to finance itself) may result in very valuable projects not becoming real. Thus, creative capitalism should not be equated with having a ‘double bottom line.’ The confusion between creative capitalism and social entrepreneurship can lead us astray, because it can lead the creative capitalists to focus solely on the search for sustainable investments, when plenty of investments may never yield a profit but will yield much greater social returns. But if we accept this point, we still have to solve the problem of aligning public recognition and social value. The solution is to create a system in which companies have an incentive to rigorously assess the impact of the projects they support or initiate, and to publish these assessments. If recognition is valuable, there will always be a tendency to try to get more than one deserves.But creative incentives for rigorous assessment will be as important for the sustainability of creative capitalism as creative incentives to deliver the goods.Excerpted from a public conversation at creativecapitalism.typepad.com
