Gates on Creative Capitalism

Bill Gates made a rousing and speech in Davos yesterday that called on companies and individuals to think more creatively about how to use capitalism to help the very poor. His core theme is that capitalism works because the potential for returns leads to innovative approaches to solving problems. The catch, however is that this system really only works for those people wealthy enough to access these innovations once they are created. Gates argues that we need to look at ways that capitalism can benefit the poorest people as well—we need to "refine the system."

As Gates sees it, "there are two great forces of human nature: self-interest, and caring for others. Capitalism harnesses self-interest in helpful and sustainable ways, but only on behalf of those who can pay. Philanthropy and government aid channel our caring for those who can't pay, but the resources run out before they meet the need. But to provide rapid improvement for the poor we need a system that draws in innovators and businesses in a far better way than we do today."

And to dissuade anyone from thinking that this is some kind of new age thinking, he invoked Adam Smith who wrote about the happiness that can be derived from helping others, and went on to point out that this sentiment was written before his famed Wealth of Nations.

While some take shots at Gates for only looking at "creative capitalism" after he had used "pure capitalism" to amass a fortune, shouldn't we be happy that a man with so much money and influence is so passionate about putting it to positive use?

FULL TEXT OF SPEECH BELOW

Thank you for that welcome and for the privilege of speaking at this forum.

This is the last time I will come to Davos as a full-time employee of Microsoft.

Some of us are lucky enough to arrive at moments in life where we can pause, reflect on our work, and say: "This is great. It's fun, exciting, and useful—I could do this forever."

But the passing of time forces each of us to take stock and ask: What have I accomplished so far? What do I still want to accomplish?

Thirty years, twenty years, ten years ago, my focus was totally on how the magic of software could change the world.

I believed that breakthroughs in technology could solve the key problems. And they do—increasingly—for billions of people.

But breakthroughs change lives only where people can afford to buy them—only where there is economic demand.

And economic demand is not the same as economic need.

There are billions of people who need the great inventions of the computer age, and many more basic needs as well. But they have no way of expressing their needs in ways that matter to markets. So they go without.

If we are going to have a serious chance of changing their lives, we will need another level of innovation. Not just technology innovation—we need system innovation.
That's what I want to discuss with you here in Davos today.

Let me begin by expressing a view that might not be widely shared.

The world is getting better.

In significant and far-reaching ways, the world is a better place to live than it has ever been.

Consider the status of women and minorities in society—virtually any society—compared to any time in the past.

Consider that life expectancy has nearly doubled in the past 100 years.

Consider governance—the number of people today who vote in elections, express their views, and enjoy economic freedom compared to any time in the past.

In these crucial areas, the world is getting better.

These improvements have been matched, and in some cases triggered, by advances in science, technology, and medicine. They have brought us to a high point in human welfare. We are at the start of a technology-driven revolution in what people will be able to do for one another. In the coming decades, we will have astonishing new abilities to diagnose illness, heal disease, educate the world's children, create opportunities for the poor, and harness the world's brightest minds to solve our most difficult problems.

This is how I see the world, and it should make one thing clear: I am an optimist.

But I am an impatient optimist.

The world is getting better, but it’s not getting better fast enough, and it's not getting better for everyone.

The great advances in the world have often aggravated the inequities in the world. The least needy see the most improvement, and the most needy see the least—in particular the billion people who live on less than a dollar a day.

There are roughly a billion people in the world who don't get enough food, who don't have clean drinking water, who don't have electricity, the things that we take for granted.

Diseases like malaria that kill over a million people a year get far less attention than drugs to help with baldness.

Not only do these people miss the benefits of the global economy – they will suffer from the negative effects of economic growth they missed out on. Climate change will have the biggest effect on people who have done the least to cause it.

Why do people benefit in inverse proportion to their need?

Market incentives make that happen.

In a system of pure capitalism, as people's wealth rises, the financial incentive to serve them rises. As their wealth falls, the financial incentive to serve them falls—until it becomes zero. We have to find a way to make the aspects of capitalism that serve wealthier people serve poorer people as well.

The genius of capitalism lies in its ability to make self-interest serve the wider interest. The potential of a big financial return for innovation unleashes a broad set of talented people in pursuit of many different discoveries. This system driven by self-interest is responsible for the great innovations that have improved the lives of billions.

But to harness this power so it benefits everyone—we need to refine the system.

As I see it, there are two great forces of human nature: self-interest, and caring for others. Capitalism harnesses self-interest in helpful and sustainable ways, but only on behalf of those who can pay. Philanthropy and government aid channel our caring for those who can't pay, but the resources run out before they meet the need. But to provide rapid improvement for the poor we need a system that draws in innovators and businesses in a far better way than we do today.

Such a system would have a twin mission: making profits and also improving lives for those who don't fully benefit from market forces. To make the system sustainable, we need to use profit incentives whenever we can.

At the same time, profits are not always possible when business tries to serve the very poor. In such cases, there needs to be another market-based incentive—and that incentive is recognition. Recognition enhances a company's reputation and appeals to customers; above all, it attracts good people to the organization. As such, recognition triggers a market-based reward for good behavior. In markets where profits are not possible, recognition is a proxy; where profits are possible, recognition is an added incentive.

The challenge is to design a system where market incentives, including profits and recognition, drive the change.

I like to call this new system creative capitalism—an approach where governments, businesses, and nonprofits work together to stretch the reach of market forces so that more people can make a profit, or gain recognition, doing work that eases the world's inequities.

Some people might object to this kind of "market-based social change"—arguing that if we combine sentiment with self-interest, we will not expand the reach of the market, but reduce it. Yet Adam Smith—the father of capitalism and the author of Wealth of Nations, who believed strongly in the value of self-interest for society—opened his first book with the following lines:

"How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it."

Creative capitalism takes this interest in the fortunes of others and ties it to our interest in our own fortunes—in ways that help advance both. This hybrid engine of self-interest and concern for others serves a much wider circle of people than can be reached by self-interest or caring alone.

My thinking on this subject has been influenced by many different experiences, including our work at Microsoft to address inequity.

For the past 20 years, Microsoft has used corporate philanthropy as a way to bring technology to people who don't have access. We've donated more than $3 billion in cash and software to try to bridge the digital divide, and that will continue.

But our greatest impact is not just free or inexpensive software by itself, but rather when we show how to use technology to create solutions. And we're committed to bring more of that expertise to the table. Our product and business groups throughout the world, and some of our very best minds at our research lab in India, are working on new products, technologies, and business models that can make computing more accessible and more affordable. In one case, we're developing a text-free interface that will enable illiterate or semi-literate people to use a PC instantly, with minimal training or assistance. In another we're looking at how wireless technology, together with software, can avoid the expensive connectivity costs that stand in the way of computing access in rural areas. We're thinking in a much more focused way about the problems that the poorest people face, and giving our most innovative thinkers the time and resources to come up with solutions.

This kind of creative capitalism matches business expertise with needs in the developing world to find markets that are already there, but are untapped. Sometimes market forces fail to make an impact in developing countries not because there's no demand, or because money is lacking, but because we don’t spend enough time studying the needs and limits of that market.

This point was made eloquently in C.K. Prahalad's book The Fortune at the Bottom of the Pyramid, and that's had a huge influence on companies in terms of stretching the profit motive through special innovation.

When the World Health Organization tried to expand vaccination for meningitis in Africa, it didn't go straight to a vaccine manufacturer. It first went to Africa to learn what people could pay. They found out that if they wanted mothers to get this vaccine for their babies, it had to be priced under 50 cents a dose. Then they challenged the partners to meet this price, and, in fact, Serum Institute in India found a new way to make the vaccine for 40 cents each. They company agreed to supply 250 million doses to distribute through public health systems over the next decade, and they are free to sell it directly to the private sector too.

In another case, a Dutch company, which holds the rights to a cholera vaccine, retains the rights in the developed world, but shares those rights with manufacturers in developing countries. The result is a cholera vaccine made in Vietnam that costs less than $1 a dose—and that includes delivery and the costs of an immunization campaign. There are a number of industries that can take advantage of this kind of tiered pricing to offer valuable medicine and technology to low-income people.

These projects are just a hint of what we could accomplish if people who are experts on the needs in the developing world would meet several times a year with scientists at software or drug companies and help them try to find poor world applications for their best ideas.

Another approach to creative capitalism includes a direct role for governments. Of course, governments do a great deal to help the poor in ways that go far beyond nurturing markets: they fund research, subsidize health care, build schools and hospitals. But some of the highest-leverage work that government can do is to set policy and disburse funds in ways that create market incentives for business activity that improves the lives of the poor.

Under a law signed by President Bush last year, any drug company that develops a new treatment for a neglected disease like malaria or TB can get priority review from the Food and Drug Administration for another product they've made. If you develop a new drug for malaria, your profitable cholesterol-lowering drug could go on the market a year earlier. This priority review could be worth hundreds of millions of dollars.

Another approach to creative capitalism is simply to help businesses in the poor world reach markets in the rich world. Tomorrow morning I will announce a partnership that gives African farmers access to the premium coffee market, with the goal of doubling their income from their coffee crops. This project will help African farmers produce high-quality coffee and connect them to companies that want to buy it. That will help lift them, their families, and their communities out of poverty.

Finally, one of the most inventive forms of creative capitalism involves someone we all know very well.

A few years ago, I was sitting in a bar here in Davos with Bono. After Asia and most of Europe and Africa had gone to bed, he was on fire, talking about how we could get a percentage of each purchase from civic-minded companies to help change the world. He kept calling people, waking them up, and handing me the phone. His projections were a little enthusiastic at first—but his principle was right. If you give people a chance to associate themselves with a cause they care about—they will pay more, and that premium can make an impact. That was how the RED Campaign was born, here in Davos.

RED products are available from companies like Gap, Motorola, and Armani. Just this week, Dell and Microsoft joined the cause. Over the last year and a half, RED has generated $50 million for the Global Fund to Fight AIDS, TB, and Malaria. As a result, nearly 2 million people in Africa are receiving life-saving drugs today.

What unifies all forms of creative capitalism is that they’re market-driven efforts to bring solutions we take for granted to people who can't get them. As we refine and improve this approach, there is every reason to believe these engines of change will become larger, stronger, and more efficient.

There is a growing understanding around the world that when change is driven by market-based incentives, you have a sustainable plan for change—because profits and recognition are renewable resources. Klaus Schwab runs a foundation that assists social entrepreneurs around the world, men and women who turn their ideas for improving lives into affordable goods or services. President Clinton demonstrates the unique role that a non-profit can play as a deal-maker between rich world producers and poor world consumers. The magazine Fast Company gives awards for what they call Social Capitalism.

These are not a few isolated stories; this is a world-wide movement, and we all have the ability and the responsibility to accelerate it.

I'd like to ask everyone here—whether you're in business, government or the non-profit world—to take on a project of creative capitalism in the coming year. It doesn't have to be a new project; you could take an existing project, and see where you might stretch the reach of market forces to help push things forward. When you award foreign aid, when you make charitable gifts, when you try to change the world—can you also find ways to put the power of market forces behind the effort to help the poor?

I hope corporations will consider dedicating a percentage of your top innovators' time to issues that could help people left out of the global economy. This kind of contribution is much more powerful than simply giving away cash, or offering your employees time off to volunteer. It is a focused use of what your company does best. It is a great form of creative capitalism, because it takes the brainpower that makes life better for the richest, and dedicates it to improving the lives of everyone else.

There are a number of pharmaceutical companies—GlaxoSmithKline in particular—that are putting their top innovators to work on new approaches to help the poor. Other companies are doing the same—in food, technology, cell phones. If we could take the leaders in these areas as models, and get the rest to match them, we could make a dramatic impact against the world's inequities.

Finally, I hope that the great thinkers here will dedicate some time to finding ways for businesses, governments, NGOs, and the media to create measures of what companies are doing to use their power and intelligence to serve a wider circle of people. This kind of information is an important element of creative capitalism. It can turn good works into recognition, and ensure that recognition brings market-based rewards to businesses that do the most work to serve the most people.

We are living in a phenomenal age. If we can spend the early decades of the 21st century finding approaches that meet the needs of the poor in ways that generate profits and recognition for business, we will have found a sustainable way to reduce poverty in the world. This task is open-ended. It can never be finished. But a passionate effort to answer this challenge will help change the world.

"Do Good" Businesses Must Be Sustainable

This post was recently submitted to the Next4Billion and is re-posted below.

It was with keen interest that I read the Atlantic Monthly article “Scents & Sensibility” published in December 2007. Being a fellow importer--with the mission of providing economic opportunity to artisans in developing countries--it was great to read of the efforts of the author, Sarah Chayes, to give Afghan men and women viable employment opportunities creating handmade soaps from local materials. In addition to being relevant to my work, the article itself was an entertaining account of one woman’s passion to “scour this harried land for its (licit) bounties and turn them into beauty products.”

A theme throughout the piece was the difficulty in working with the local consulting firm that administers USAID’s alternative income generation program. While I can appreciate the frustration in dealing with a bureaucracy like USAID (or in this case the consulting firm managing its contract), something else tugged at me when reading this article. Namely, that when it comes to companies trying to do “good,” as well as do well financially, people often assume that an unsophisticated business approach is acceptable.

There is no doubt in my mind that Ms. Chayes works very hard and that her motivations are certainly commendable. I'm also confident that the consulting firm could likely have made things a lot clearer and helped her through the process in a less convoluted way. However, if we had been reading an article about a traditional company looking for investment dollars and the future CEO said the following: “And with zero experience, I was going to try to create a product for which conventional wisdom said the market was saturated. To launch this venture, I had $25,000 from a private foundation in Chicago, and a single collaborator back in the United States—a 16-year-old high-school student from outside Boston...,” no one would be outraged when a potential investor said, put a business plan together and then went on to ask for more numbers.

Again, I commend Ms. Chayes for her perseverance in the face of many difficult hurdles. My point is not so much aimed at this particular instance, rather I believe that fair trade, environmental or otherwise mission-based companies need to start acting more like businesses and less like nonprofits if they are going to be taken seriously by investors or customers. The world needs more people like Sarah Chayes, but it also needs more “traditional” business people to partner with her to build sustainable organizations that deliver on their missions as well as their bottom lines. This is the combination that will lead to real, lasting change.

Stop The Madness

The situation in Kenya has not seemed to improve much since my last post. Interestingly, just days after the election, I heard from my friends and colleagues in Kenya that things might not be as bad as the media had made it out. Now, however, a couple weeks later, the media coverage has really diminished (at least in the US) and it seems like things continue to get worse. Inside Kibera slum members of the Kikuyu tribe have been driven from their homes and shops, which in many cases were burned to the ground, and these people are now living in a makeshift tent city inside a national park. The World Food Programme has even had to step in to provide basis food stuffs to people who only weeks ago had small but thriving businesses inside Kibera.

It's unclear what will set things back on a course of normalcy in Kenya as power-sharing negotiations seem to have limited support from the opposition. With Kenya previously thought of as a model pro-business stability, prolonged uncertainly will not only be devastating to Kenya, it could have a ripple effect throughout the Great Lakes region as investors lose confidence. Let's hope this madness stops sooner, rather than later!

A Rocky Start to 2008

Personally, I was quite fortunate to ring in the new year with friends while on a short but sweet holiday. Unfortunately, when I came back most of the international news I saw was terrible. First Benazir Bhutto was assassinated and then I heard about all the crazy rioting and killing in Kenya as a result of disputed elections.

Although we don't purchase from any groups in Pakistan, I have visited the country and encountered incredibly friendly people and Ms. Bhutto was my commencement day speaker in college so I have a warm place in my heart for this nation. As for Kenya, I've been fortunate to visit many times both for work and pleasure and have made good friends there. It is a country that over the past four years I have found relatively easy to work in, and I always had the feeling that people took pride in the progress Kenya has made in working to reduce corruption and increase individual opportunity.

Let's hope these two sad crises can somehow shock people into positive action and make 2008 a truly great year, and not one full of even more destruction.