“Bah! Humbug!” in the Wall Street Journal

Two recent articles in the Wall Street Journal have taken shots at elements of philanthrocapitalism – the idea, endorsed by many of the most successful capitalists, that capitalism needs to make a more deliberate effort to improve society. Like Dickens’ Mr Scrooge, the writers’ response to the suggestion that firms and business leaders could do a better job in serving society seems to be “Bah! Humbug!”- and, in saying so, they are letting down the capitalist cause they claim to defend.

The first, by Kimberly O. Dennis, who runs the Searle Freedom Trust, takes a sideswipe at the Gates/Buffett Giving Pledge, worrying that the signatories are giving away too much money, since “the wealthy may help humanity more as businessmen and women than as philanthropists”. This is a line the Journal has run before. Three years ago, in fact, in an article by the Harvard economist  Robert Barro, which we discuss at some length in the concluding chapter of the book.

Dennis does make the important point that the idea of the rich ‘giving back’ can give the impression that they have taken something in the first place when, in fact, they have created wealth and jobs through their entrepreneurship. (A Marxist wouldn’t agree with her, of course – but you don’t have to be a Marxist to acknowledge that at least some billionaires around the world have made their money not by creating wealth but by expropriating it, through running exploitative monopolies or ripping off the public by acquiring assets on the cheap in dodgy privatisations.)

One weakness in the Dennis/Barro argument is that they think there is a contradiction between giving money away and wealth creation. That’s not how Warren Buffett sees it – as he approaches his eightieth birthday he is as focused as ever on making money. George Soros too told us how philanthropy cured his mid-life crisis and inspired him to make even more money. True, Bill Gates has stepped down from running Microsoft – but, as we report in the book, he felt that the time had come to give someone else a go at the helm of Microsoft and that his energies would be better engaged on new projects, philanthropic and otherwise. Maybe he, not a lobbyist or an academic economist, is the right person to judge in what activities he can achieve most with his time, energy and entrepreneurial gifts. (Dennis, in particular, should agree that nobody is more likely than Gates to know how to run his life and how to deploy his assets, given she runs an organisation with the mission to “promote individual freedom and economic liberty”.)

Another weakness in the argument against giving is the assumption that philanthrocapitalists will inevitably be less successful in improving the world through their philanthropy than they have been through their money-making. This is nothing more than defeatist thinking. As we describe in the book, the new generation of givers led by Gates and Buffett are applying many of the skills and strategies that they honed in business to their giving, and are starting to achieve some success. It is true that the failure rate in philanthropy is high – but, as Buffett points out, that is because the problems are often harder than those facing a business person such as himself, who he describes (perhaps with excessive modesty) as always going after the “low hanging fruit”. Our society stands to gain from the fact that our most successful business people are increasingly trying to put their skills and assets to work in tackling some of society’s biggest problems and it is premature, to say the least, to assume they are doomed to fail.

Nor do many of today’s philanthrocapitalists make the sharp distinction that Dennis does between making money and giving it away. Many of them are into making a buck while doing good. E-bay founder Pierre Omidyar has set up his philanthropic organisation Omidyar Network not as a traditional foundation but as a company that can apply the right kind of capital to the problem in hand – sometimes grants, sometime for-profit investments. He has already had some success in encouraging for-profit microfinance, falling out along the way with Muhammad Yunus, the Nobel prize-winning founder of the Grameen Bank. Others, including Gates, are also entering this growing “social investment” space – which rather than harming the process of wealth creation may actually lead to the discovery of better ways of wealth creation that will make capitalism more successful than ever.

Companies, too, are increasingly rethinking their engagement with society not out of charity but with a view to ‘doing well by doing good’ – although this too provokes the Journal‘s ire. This time it is Aneel Karnani, a strategy professor at the University of Michigan, whose arguments are so confused that he has surely been advising that state’s car makers on strategy for the past 30 years. He has the cudgels out for the corporate philanthrocapitalists because “in most cases, doing what’s best for society means sacrificing profits”. 

Karnani believes there are two possible states of the world in which business operates – one in which markets are perfectly aligned with public interests, in which case corporate social responsibility is unnecessary; the other, in which the market is not aligned with public interests, in which either the drive to make profit will overwhelm any pressure to be socially responsible, or socially responsible behaviour will harm the paramount interests of shareholders. The only real solution, he says, is government regulation – though ultimately he doesn’t seem convinced that will work either, which leaves us, er, where, exactly? Still, the Wall Street Journal‘s editors must really hate CSR if they are willing to give so much space to someone arguing (even half-heartedly) for more government regulation. The big surprise is they didn’t run our friend Chrystia Freeland’s recent article blaming the BP oil spill on CSR.

There are some grains of truth in Karnani’s article. There has been plenty of bad corporate philanthropy over the years. The phrase corporate social responsibility is certainly unattractive and clunky, not designed to excite the animal spirits as we would wish. But he, along with most of today’s critics of CSR, fails to engage with what is actually going on in leading firms in the name of CSR and, in particular, of doing well by doing good.

Above all, the description of a world stuck in two states, one of markets aligned with public interests the other not, is a fantasy. In reality, markets and their relation to public interests are constantly evolving – and the actions of companies play a crucial role (through the sort of products they introduce and through lobbying, for instance) in whether they evolve in a direction that serves the public interest or undermines it.

Much of the current focus on doing well by doing good is the result not of pressure from outside busybodies but of companies trying to figure out how to build flourishing markets in the developing countries where they hope to enjoy much of their future business growth and how to win the battle for talent in a world where workers are increasingly choosy about the ethics and mission of the firm they work for.

As we argue in our latest book, “The Road From Ruin”, the current economic crisis was caused not least by endemic short-termism in capitalism, whereby the leaders of many firms put short-term profit maximisation ahead of long-term profit maximisation. Our belief is that had they focused more on the long-term, they would have followed strategies that were much better for society and for their shareholders – who, let’s not forget, are all of us who live in society, as we collectively own many of these firms through our savings.

Corporate history is littered with companies who went for the fast buck and cut ethical corners – think of Nestle selling babymilk formula and Nike’s once-cruel supply chains – that cost their shareholders dear. (Both firms learnt the hard way that such social failures were bad for long-term shareholder value.) More of the sort of pressure on executives demanded by CSR to take off the quarterly profits blinkers and look at the wider picture would surely be a positive development in capitalism.

Karnani’s argument reminds us of the old joke about the economist who won’t pick up a $20 bill left on the sidewalk, reasoning that if it were a $20 bill someone else would have picked it up already. That jibe is made at the expense of economists who believe that markets are always efficient and that, therefore, there could never be a massive market crash. Oh dear. Yet the supporters of this idea have responded to the financial crisis by blaming all the problems on government meddling in markets rather than any imperfection on the part of the markets. This denialism now seems to have evolved into outright hostility to any suggestion that anything but capitalism red in tooth and claw is a perversion of the true faith, rather than constructive engagement with ideas designed to improve how capitalism works.

When Philanthrocapitalism came out, just as the markets crashed in September 2008, the Journal gave the book a very favourable review. In the aftermath of the biggest crisis of capitalism in more than half a century, hopefully philanthrocapitalism has not become a heresy for this influential pro-market newspaper.