William Easterly, author of The White Man’s Burden has an interesting piece in the Wall Street Journal today where he responds to Bill Gates’ call for “creative capitalism” Gates argues that the way capitalism is practiced it doesn’t help the poor and argues for increased philanthropy on the part of businesses.
Easterly points out that :
Profit-motivated capitalism, on the other hand, has done wonders for poor workers. Self-interested capitalist factory owners buy machines that increase production, and thus profits. Capitalists search for technological breakthroughs that make it possible to get more output for the same amount of input. Working with more machinery and better technology, workers produce more output per hour. In a competitive labor market, the demand for these more productive workers increases, driving up their wages. The steady increase in wages for unskilled labor lifts the workers out of poverty.
The number of poor people who can’t afford food for their children is a lot smaller than it used to be — thanks to capitalism. Capitalism didn’t create malnutrition, it reduced it. The globalization of capitalism from 1950 to the present has increased annual average income in the world to $7,000 from $2,000. Contrary to popular legend, poor countries grew at about the same rate as the rich ones. This growth gave us the greatest mass exit from poverty in world history.
The parts of the world that are still poor are suffering from too little capitalism…
Easterly points out that governments and philanthropists just don’t have enough information and knowledge to make the right decisions. This is why they have failed and why markets have worked. It is the age-old problem that Friedrich Hayek called The Fatal Conceit.
Moreover, how do philanthropists choose just which product is going to be the growth engine of a country? Much research suggests that “picking winners” through government industrial policy hasn’t worked. Winners are too unpredictable to be discovered by government bureaucrats, much less by outside philanthropists.
There are many people with good intentions who want to help the poor live according to their dignity, but good intentions often don’t mean good policy.
We know what has helped the West create prosperity. It was not foreign aid or philanthropy–it was the key institutions of private property, rule of law and free exchange that created a framework for markets and for entrepreneurs to use their energy and insights to meet the needs and wants of millions. What the developing world needs is less aid and more of the institutions of freedom.