Creative Capitalism

Re-opening for business (in one form or another)

by Conor Clarke

Hi again, and sorry for the publishing hiatus. The Creative Capitalism book is now done. It comes out December 2 -- "just in time for the holidays" -- and you can find it on Amazon here.

I think the book's imminent release is a good time to reopen the website. To be perfectly honest, I have no clue what the site will become. But I have the vague feeling it should become something. In part this is because there is apparently continued interest in the subject: I've received a good number of emails over the past few months wondering what happened to the discussion and if it's coming back. The answer is yes.

(Sorry if I didn't respond, by the way ... If you've sent me something in the past two months and I haven't replied, please send it again now: conorjclarke {at} gmail {dot} com.)

I'd also like to reopen the site because it feels timely: Capitalism has done a lot of soul-searching recently (along with some collapsing). Creative Capitalism isn't particularly relevant to much of that process. Actually, one of the big themes of this discussion -- "how can we expand the wonderful incentives of capitalism into areas where they have not previously operated?" -- seems woefully ill-timed. But another one of the themes -- "should companies pursue goals besides profit maxmization" -- strikes me as pretty relevant.

Finally, there will be housekeeping. Some of the content will come down, new content will come up, as will pictures and book publicity information. And if you have other ideas for things to do with the site, please email me.

What we were saying

By Tracy Williams, Michael Deich and Josh Daniel

Steven Landsburg writes: “I have no idea what the authors of this memo are trying to say.” We hope this note will help clear things up.

Corporate Social Confusion

By Martin Wolf

(This is an excerpt from a speech delivered in January 2007 before Harvard Business School alumni in London.)

The notion of corporate social responsibility is intensely confused. In particular, it mixes up three quite distinct ideas: intelligent operation of a business; charity; and bearing of costly burdens for the benefit of society at large. The first is essential; the second is optional; and the third is impossible, unless those obligations are imposed on competitors.

Profit-maximization as the sole goal of a corporation

By Martin Wolf

What is the goal of the limited liability, joint-stock company, the core institution of the contemporary capitalist economy? What implications does the answer have for such a company's freedom to be “creative” in the way Bill Gates uses the term? The classic answer to the first of these questions, repeated often in these discussions, is that its aim is to maximise profits. This statement is not false. But it is vastly too limited. Here are ten points relevant to this theme.

A Creative Capitalism Compendium

By Clive Crook

The most frustrating thing about the debate Bill Gates has started is that the term “creative capitalism” is so vague. It covers so many different sorts of activity that it resists a simple up or down vote. Rather than yielding to the temptation to come out for or against Bill’s claims about creative capitalism, it might be more productive to make a few distinctions among the different ways the idea could be put into practice, sometimes with good results, sometimes not so good.

A new division of labor

By Matthew Bishop

Two recent posts capture polar opposite views on creative capitalism. Michael Edwards wants governments to solve social problems:

“Why all the paraphernalia of “corporate social responsibility” when firms could simply pay their taxes, create jobs with decent wages, obey the regulations that govern markets in the public interest, and stop subverting politics to pursue their short-term goals?”

While Steve Bartin wants to squeeze the state out of the delivery of services such as education:

“…. Those who don’t want to fund public education through property and other taxes would no longer be coerced into doing so. Civic groups, charities, and others could step in to help those in need.”

Both are wrong.

What Bill Gates really means by creative capitalism

By Martin Wolf

Like most economists, I find the notion that we need a creative form of capitalism somewhat peculiar, particularly from the most successful – and, arguably, one of the most ruthless – capitalists of the past three decades. How can a man who played such a big role in the development of today’s information technology industries believe that capitalism is not creative. Creation and -- as Joseph Schumpeter remarked -- destruction are what capitalism does.

So what is Mr Gates trying to say? My interpretation comes down to just two simple points: first, capitalism is more innovative, more flexible and, indeed, more creative than any other system known to humanity; and, second, it cannot do anything if there is no demand. We can see needs (yes, my fellow economists, there are such things as needs, as you would discover if you were deprived of water for a few days), but, in the absence of purchasing power, these do not become demands (you might just die of thirst, instead).

Why not have profit-maximizing governments?

By Arnold Kling

In defense of the notion that profit-maximization must be tightly constrained, Martin Wolf writes: “But what is a confiscatory government? It is just a government run by profit-maximizers.”

Not so fast.  If a government were truly trying to maximize profits, then it would be managing a country in such a way as to increase its wealth. 

More public policy, please

By Matt Miller

I’d like to offer a closing provocation that challenges the premise of creative capitalism’s proponents. Because the truth is -- apart from finding new commercial opportunities, a la C.K. Prahalad -- business’s greatest potential contribution to the global poor has nothing to do with how companies operate. It lies instead with the broader public policies that capitalists support or oppose.

Here’s my logic (using the U.S. as an example):

Against Creative Capitalism, Part Two

By Richard Posner

I wish in closing to emphasize how little corporate philanthrophy (the practical meaning of “creative capitalism,” a terrible expression that implies nonaltruistic capitalism is uncreative) is actually philanthropic, in the sense of being driven by altruism rather than by profit maximization. Selling “fair trade coffee,” as Starbucks does to those customers willing to pay a premium for it, is not corporate philanthropy. It’s just supplying a product at the profit-maximizing price to a person who is an altruist. Business is happy to sell to altruists, just as it is happy to sell to selfish people. Selling “fair trade coffee” is no different, from the corporation’s standpoint, from selling leather clothes to sadomasochists. Likewise with Nike’s efforts to improve working conditions in its foreign plants: it is an example not of corporate philanthrophy but of a corporate response to consumers’ demand for a different production method. The hybrid car is a similar example, though the principal pitch is to the consumer’s desire to spend less on gasoline rather than to his desire to reduce global warming.

Closing arguments

By Conor Clarke

The purpose of this site was to generate a discussion that would lead to a book, and we feel like we're getting pretty close. The site will stay alive and we will continue to post items, and of course comments are still welcome. But in order to let Simon & Schuster publish the book by the end of the year, we are going to be concentrate more on editing the flood of words down to book-length.

What makes profit-maximization possible

(The problem with competitive capitalism is not that it is uncreative, but that it is unnatural.)

By Martin Wolf

I agree with everything Professor Landsburg says. The difficulty is not with what he says, but with what he does not say. What he does not address is how a capitalist system works. And as soon as one asks this question, one realizes that what distinguishes successful capitalism is not how broadly the profit-maximization principle, beloved by economists, applies, but how tightly circumscribed it has to be.

A Response to the Gates Foundation Memo

By Steven Landsburg

I have no idea what the authors of this memo are trying to say, and neither, I am pretty sure, do they.

Re: Capitalism and morality revisited

By William Easterly

Professor Ormerod, in your last post, I thought you were feeding stereotypes of evil corporate leaders more than you are analyzing the capitalist system. With defenses of capitalism like this, I don't think we're going to have much success "dispelling hostility to capitalism."

The Gates Foundation on Creative Capitalism

By Tracy Williams, Michael Deich and Josh Daniel

Bill Gates first talked publicly about creative capitalism in his Harvard commencement speech last year. Because Bill felt the idea was so promising, he expanded on the concept in his speech at the World Economic Forum and, more recently, in the pages of Time magazine. The idea has been developed even further through discussions on this site. We’re delighted that so many distinguished thinkers have shared their views on creative capitalism in this venue, raising important critiques or offering supporting ideas and evidence. Informed by those posts, this note attempts to take stock of where we think creative capitalism is now.

Yes, they really can

By David Vogel

Conor, I welcome the opportunity to respond to the questions you raise about my analysis.

Your distinction between firms that engage in various forms of creative capitalism in the interests of profit maximization and those whose good works represent a real sacrifice to the bottom line is an artificial one. In practice, it is virtually impossible to distinguish between the two, since I am unaware of almost any publicly traded corporation that deliberately sacrifices corporate profits in order to make the world a better place.

Putting the creativity back in creative capitalism

By John Quiggin

Although the conversation here takes place under the banner of 'creative capitalism' there has been relatively little discussion of creativity in the ordinary sense of the term. Yet the relationship between creativity and capitalism has rarely been more complex and interesting than it is today.

Holding aid agencies accountable

An email exchange between William Easterly, Esther Duflo and Michael Kremer.

From: William Easterly
To: Esther Duflo and Michael Kremer

Dear Esther and Michael,

I have a question I have been meaning to ask both of you.

Yet more on fiduciary obligations

By John Quiggin

I’m planning a further post about the notion of ‘creative capitalism’, but before I get on to it, I thought it might be useful to clear up some of the confusion surrounding the alternative view, that managers have a ‘fiduciary obligation’ to act solely in the interests of shareholders, reflected in debate at my blog, at Crooked Timber  (including this) and here at the Creative Capitalism blog.

But can they really?

(Or, why Gary Becker's question still nags at me.)

By Conor Clarke

David, before I read your piece, the simplified way in which I'd been dividing the world of creative capitalism (as it applies to corporations) was as follows: First, there are firms for which "recognition" is just another word for profit maximization -- that is, they do good things because it gives them a happier staff, or attracts more dedicated consumers, or helps them disguise greed, or whatever ("public relations charity," in Posner's words). Second, there are firms for which good works do mean a real sacrifice to the bottom line. And even if these firms get some kind of recognition out of the sacrifice, it isn't recognition that translates readily into profits.

Yes, they can

Why altruistic firms can survive in a competitive market. (Or: Why Gary Becker shouldn't worry.)

By David Vogel

More than a century ago, Sears Roebuck's Julius Rosenwald pioneered an innovative approach to corporate philanthropy that exemplifies Gates’ contemporary vision of creative capitalism. In the late nineteenth century farmers were then among the least affluent of Americans, and American farming practices were inferior to those of western Europe. And so, shortly after purchasing Sears in 1895, Rosenwald decided to help disseminate the scientific farming knowledge and new farming skills that had been developed during the previous two decades, but were still inaccessible to all but the richest and largest farmers.

Capitalism and morality revisited

By Paul Ormerod

Professor Easterly is disarmingly flattering about my work, so it is not easy to take issue with him. In fact, we do agree on fundamentals. 

Two points to put this beyond doubt. First, I am an unequivocal enthusiast for both capitalism and liberal democracy. Second, like Professor Easterly, I regard Hayek as being, by some margin, the greatest social scientist of the 20th century. The research agenda for the 21st century is dominated by his insights.

But capitalism is not the same as unrestrained free markets, mediated neither by formal regulation nor by informal norms. And a key insight of Hayek is that we make progress not by the ‘rational’ analysis of the central planner, but by experiment and evolution.

Reader Submissions, Take 4

A fresh round of reader submissions are here from: Jessica Haeussler, John Stewart, Michael Edwards, Amitav Misra, Ken Goldsholl, and Steve Bartin. As always, we welcome any and all thoughts; if you're interested in participating, please send them to conorjclarke - at - gmail.com. Thanks!

-- Kyle Chauvin

Does recognition actually work?

Bill Gates put a lot of emphasis on “recognition” as a “market-based incentive.” I think that’s worth examining closely. Many contributors has argued about whether it’s legitimate for a company’s managers to divert resources to social ends – with Steven Landsburg, and the spirit of Milton Friedman, at the heart of the debate. But there’s another question here: would this work? Will the quest for a good corporate name actually provoke the behaviour we’d like to see?

By Tim Harford

What makes creative capitalism hard?

There is 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. But 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.

By Esther Duflo

Re: Posner and fiduciary obligations

By John Quiggin

I’d like to return to the notion of fiduciary obligation: that firms are obligated to act in the interest of stockholders or, more specifically in Richard Posner’s formulation, to maximize corporate profits.

Maximize which profits, and for whom?

By Justin Fox

There's already been ample discussion here of Milton Friedman's famous argument that "The Social Responsibility of Business is to Increase Its Profits." But I haven't seen any explicit mention of the possibly even more influential academic paper inspired by Friedman's essay: Jensen's and Meckling's 1976 "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure."

Re: Our creative mortgage crisis?

By Vernon Smith

Larry Summers speaks well for many of us who have long thought of Fannie Mae and Freddie Mac as time bombs waiting to go off. There is nothing intrinsically wrong with lending long (even 30 years for a house), borrowing short, and refinancing the short-term borrowing again and again to cover the 30-year loan. It's just that success in such an endeavor requires more stability in the economic environment than it is likely can be delivered. In particular, such contracting arrangements and the institutions designed to implement them have not fared well historically.

A response to Alex Friedman

By Steven Landsburg

It is useful to talk about how foundations can best spend their resources.  But it does no good at all to pretend there's such a thing as a free lunch.   Alex, you talk about "150 million [the foundation] may never have to pay," but on average it *will* have to pay 150 million. Sometimes it will pay zero; sometimes it will pay 300 million; sometimes it will pay more.  The reason the 150 million is on the books is because it's a reasonable expectation of the cost of this program.

Foundations have a role, too

By Alex Friedman

"Creative Capitalism" is mostly about reforming the way businesses work. But since much of the discussion so far has involved the role of government, I would like to point out that creative-capitalist thinking can help private foundations achieve their goals as well.

Reader Submissions, Take 3

Please take a look at these new contributions from Michael Martin, Christopher Prottas, Robert Hambrecht, Benjamin Yeoh, and Lloyd Sakazaki. We continue to welcome any and all thoughts, and again, please send them to 'conorjclarke - at - gmail.com'. Thanks!

-- Kyle Chauvin

How the aid industry got creative

By Nancy Birdsall

This discussion of creative capitalism  has  featured a variety of pieces on the outcomes produced by foreign aid -- with views ranging from support, to skepticism, to outright hostility. But what’s notable in fact is that the aid “industry” writ large (including not just the official practitioners but the academics and think tankers that scrutinize it, presumably in search of influence and recognition since they don't seek profits) has gotten creative itself lately – about new ways to transfer aid money that exploit market mechanisms and harness the power of markets to help the poor.

Our creative mortgage crisis?

By Lawrence Summers

Here is a really good creative capitalism idea. All Americans benefit from increases in home ownership because of the values like hard work, community, and respect for property that ownership instills. Families want desperately to own their own homes and accumulate equity. Yet it is very hard for conventional banks that borrow money over the short term to lend over the kind of 30-year horizons that best help families buy houses.

How can the objective of ownership be best supported and how can the most adequate financing be assured? Voila, creative capitalism! How about chartering private companies as government sponsored enterprises with the mission of promoting home ownership affordability? Give them boards with some private representatives and some public representatives. Make clear that government stands behind their capital market innovations so they can borrow more cheaply and pass the savings on. Exempt them from the state local taxes that others pay. Give them specific objectives on affordability that they must meet. Rely on a special government regulator to assure that they balance their social responsibility with their drive to profit. Harness the profit motive to meet a social objective.

Global recognition replaces local shame

By Nancy Birdsall

Note that the Janus face of recognition is shame. When corporations go global, their leadership is less vulnerable to shame that can be generated by neighbors and friends. It may be that at the local level the risk of shame carries greater weight than the benefits of recognition, because the risks are more specific and personal. Potential shame that is local surely helps explain personal contributions by “small-town” corporate leaders to local culture or corporate sponsorship of the local Little League team.   

A response to Jagdish Bhagwati

By Matthew Bishop

Jagdish Bhagwati is right to highlight the political threat to the sustainability of capitalism and provides a useful framework to understand this risk. Whether we like it or not, the global economic slowdown is going to bring the wealth of the super-rich into question.

A response to Michael Kremer on foreign aid

By William Easterly

I am disposed to agree with Michael Kremer that a steady direct transfer of income to poor people would be a good outcome for foreign aid.

Unfortunately, this has virtually nothing to do with the way aid actually operates. Most official aid is given to governments in poor countries, and there is plenty of evidence against the proposition that this aid is seamlessly transferred to the poor individuals in these countries. Studies show aid mostly winding up in government consumption, where it finances local bureaucracy, perks for state officials, and corruption much more than good things like health services.

What makes capitalism work?

By Jagdish Bhagwati

I believe Capitalism flourishes, in the teeth of inevitable inequality, when one of five conditions is fulfilled:

What makes a weak state?

By Abhijit Banerjee

I have never quite understood what it means to be a weak state. Do we mean a state where the institutions of popular control are strong---democracies or responsive governments? Where does this place Suharto's Indonesia, Deng's China, Chiang Kai-shek's Taiwan, Mahathir Mohammed's Malayasia, General Park's South Korea, and indeed almost every East Asian Tiger (or other large carnivore)? They did eventually deliver quite a lot to their people, but showed relatively little patience with anyone who dared to question their authority along the way.

Creative Capitalism in Context

By Nancy Koehn

Gates has earned our ear (and for many of us, our respect) largely because he succeeded so convincingly playing the game of market capitalism that first emerged in the late nineteenth century and grew to great influence during the twentieth century. This game or system has been dominated in many industries by large, multinational corporations that compete intensively—usually with a small number of rivals—for market power. (Indeed, at the Harvard Business School where I have taught business history to thousands of MBAs, students often compare the early growth of Standard Oil to that of Microsoft one hundred years later. They also compare John Rockefeller to Gates, arguing that both entrepreneurs saw the outlines of competition in their respective industries before other players and could thus act quickly to create and control what become the standards of rivalry in each young market). The economic spoils of this system have been valued and distributed in different ways—through employment patterns, market share, business investment, and most prominently, stock market performance

Two Cheers for Creativity

By Gregory Clark

I previously joined in the general rejection by economists, such as Gary Becker, of Bill Gates’ proposal for “Creative Capitalism.”  But on reflection I am also attracted to elements of the position of Michael Kremer in his posting “In Defense of Recognition” that non-pecuniary motives can be very powerful, and could be productively harnessed by modern profit-driven corporations.  For any attempt to tell the history of the Industrial Revolution and the rise of the modern world in purely Chicago School terms, as the unleashing of the profit motive by free competition fails.  The innovative firms at the heart of the modern Industrial Revolution depended as heavily on idealism, pride, and the search for fame as they did on the desire to make money.

Don't Change Capitalism -- Expand it.

By Kyle Chauvin

The call for something called "creative capitalism" reflects a recognition that market incentives hold the potential to solve problems that baffle even the most concerted efforts of philanthropy and state action. But what comes out of that recognition seems to me a bit odd: a call for capitalism, as practiced in advanced economies that already practice it best, to be changed or fixed. Before we devote a lot of energy to reforming capitalism at home, where it already works pretty well, maybe we should devote more effort to extending capitalism's reach in places where it hasn't yet fully flowered.

Re: What about lobbying?

By Nancy Birdsall

It’s always seemed to me that one of the best things that global firms operating in developing countries can do is a different sort of lobbying from that mentioned by John Williamson: lobbying for a level playing field – in settings where their choice is to join others in seeking noncompetitive privileges from government through bribery or other pressures, or resist the “competitive” pressure and lobby for fair rules and effective enforcement.

What are we talking about? Part Two

By Steven Landsburg

By way of harping on the point I made here, let me point to a paragraph from Michael Kremer's post here:

Suppose Lufthansa found that it lost $15,000 last year on a particular African route. The social benefits of bringing more tourists and business people to Africa, and bringing down airfares for Africans traveling outside the continent would likely greatly exceed this. I wouldn't condemn the directors of Lufthansa if they decided to keep flying the route, and I doubt it would drive them out of business.

I too doubt that this would drive Lufthansa out of business.  But that does not absolve us from thinking about where the $15,000 comes from.

Even government can be creative

by Michael Kremer

Bill Gates’ talk on creative capitalism focused on things that businesses can do on their own to help address problems of poverty in the developing world. This is all to the good. However, governments can also open opportunities for the private sector to help provide health and education in the developing world. Rigorous evaluations of some recent efforts to let the private sector deliver government-funded services in developing countries show encouraging increases in access and quality of services.

Can creative capitalism work in weak states?

By Eric Werker

Creative capitalism has the most work to do in weak states, where poor institutions impede the political process, misdirect the private sector, and produce terrible education and health outcomes. Indeed, as Professor Glaeser argues, one of the best things creative capitalists can do in the face of missing government is to step in and pick up the slack.  But weak states today have a host of qualities that could keep creative capitalism from saving the day--in the worst case, creative capitalism could just add to the problem.

Does foreign aid create weak states?

By Michael Kremer 

One issue that has come up in the discussion relates to the overall impact of aid to developing countries. Richard Posner’s skepticism about creative capitalism seems to stem in part from a larger skepticism about aid. But is that skepticism warranted?

Saving the Social Sector

By Abhijit Banerjee

I am frankly a little baffled by this conversation about the feasibility and/or moral justifiability of creative capitalism. Capitalism, after all, is a system that draws a lot of its strength from the fact that successful entrepreneurs end up with huge rents -- not just normal profits on their equity but what some people would call obscene amounts of money. If those successful entrepreneurs want to “consume” their rents in the form of doing what they consider to be good for the world, who are we to tell them that they can’t? Indeed, isn’t a part of capitalist ideology that choice increases the value of money?

Tax the Rich

By John Roemer

Quite apart from the legal problems of adopting corporate charity -- due to a firm's fiduciary responsibilities, discussed elsewhere -- there are substantial objections to relying on a form of charity as the redress for excessive inequality. Many, myself included, believe that justice requires a far more equal distribution of income and material benefits than currently exists in the United States, let alone in the world. Repairing the present injustice should not be left to charity (or corporate philanthropy), but should be a state mandate.

What about lobbying?

How firms can use it to achieve socially responsible ends.

By John Williamson

I agree with many of the criticisms that have been directed at Bill Gates' speech. “Creative capitalism” is essentially a new expression for what has long gone under the banner of corporate social responsibility. Many of the practices advocated are a way of maximizing profits, and it may be worth emphasizing to students in business schools that enlightened self-interest can actually be more profitable than being red in tooth and claw. But this hardly amounts to a novel theoretical insight. It is probably true that Bill Gates did more for the poor by his work as a businessman who focused on helping the non-poor than he can hope to accomplish for them in his new role. One may not feel that maximizing the wealth of the shareholder is the most noble human calling, but firms that stray too far from that injunction get taken over by those more ruthless.

Reader Submissions, Take 2

Here is another go at reader submissions. This time we have pieces from Elliot Schwartz and Charley Johnson, Luis Garza Sada, Thierry Lefebvre and Anthony M. Castaldo. To repeat: you're welcome to send a reply to the submissions below, as well as general criticism, suggestions and enthusiasm! Send everything to conorjclarke [at] gmail [dot] com. Thanks.

-- Kyle Chauvin