Bill Gates: A New Approach to Capitalism in the 21st Century
- 28 January, 2008 07:12
As you all may know, in July I'll make a big career change. I'm not worried; I believe I'm still marketable. I'm a self-starter, I'm proficient in Microsoft Office. I guess that's it. Also I'm learning how to give money away.
So, this is the last time I'll attend Davos as a full-time employee of Microsoft.
Some of us are lucky enough to arrive at moments in life when 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 ago, 20 years ago, 10 years ago, my focus was totally on how the magic of software could change the world. I saw that breakthroughs in technology could solve key problems. And they do, increasingly, for billions of people.
But breakthroughs change lives primarily 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 the market, so they go without.
If we are going to have a chance of changing their lives, we need another level of innovation. Not just technology innovation, we need system innovation, and that's what I want to discuss with you here in Davos today.
Let me begin by expressing a view that some do not share: The world is getting better, a lot 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 during the last 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 many crucial areas, the world is getting better.
These improvements have been triggered by advances in science, technology, and medicine. They have brought us to a high point in human welfare. We're really just at the becoming of this technology-driven revolution in what people can do for one another. In the coming decades, we'll have astonishing new abilities: better software, better diagnosis for illness, better cures, better education, better opportunities and more brilliant minds coming up with ideas that solve tough 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 get 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.
So, the bottom billion misses the benefits of the global economy, and yet they'll 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? Well, market incentives make that happen.
In a system of 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 incredible innovations that have improved so many lives.
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 a helpful and sustainable way, but only on behalf of those who can pay. Government aid and philanthropy channel our caring for those who can't pay. 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 of those who don't fully benefit from today's market forces. For sustainability we need to use profit incentives wherever 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 incentive, and that incentive is recognition. Recognition enhances a company's reputation and appeals to customers; above all, it attracts good people to an 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.
This week's Economist had a section on corporate responsibility, and it put the problem very nicely. It said it's the interaction between a company's principles and its commercial competence that shape the kind of business it will be.
The challenge here is to design a system where market incentives, including profits and recognition, drive those principles to do more for the poor.
I like to call this idea 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 very 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 can serve 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 the work Microsoft does 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 US$3 billion in cash and software to try to bridge the digital divide.
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 in our research lab, including a special focus in 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 an 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, together with software, can avoid the expensive connectivity costs that far more than the cost of software or hardware is what stands 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 even because money is lacking, but because we don't spend enough time studying the needs and requirements of that market.
This point was made eloquently in CK 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.
An example of this is 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 at 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. It agreed to then supply 250 million doses to distribute through public health systems over the next decade, allowing it to also sell into the private sector.
In another case, a Dutch company, which holds the rights to a cholera vaccine, retained the rights for the developed world, but shared those rights, with no royalty, 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 the overall immunization campaign.
Because many of today's advanced products have low marginal costs, whether it's software or medicines or media, so many things, this idea of tiered pricing to offer valuable goods for the poor in a way they can afford it, can be used more broadly than ever before.
These projects I think provide a hint of what we can accomplish if people who are experts on needs in the developing world meet with scientists who understand what the breakthroughs are, whether it's in software or drugs. Together they can help find poor world applications for the very best ideas.
Another approach to creative capitalism includes a direct role for governments. Of course, governments already do a great deal to help the poor in ways that go far beyond just nurturing markets: They fund aid research, healthcare; they've done great things. But I believe the highest-leverage work that governments can do is to set policy to create market incentives for business activity that improves the lives of the poor.
Under a United States law, recently signed by President Bush, any drug company that develops a new treatment for a neglected disease like malaria or TB can get a priority review from the FDA for another product they've made. If you develop a new drug for malaria, your profitable say cholesterol-lowering drug could go on the market up to a year earlier. This priority review could be worth hundreds of millions of dollars.
Another approach to creative capitalism is simply to help the businesses in the poor world reach markets in the rich world.
Tomorrow morning I'll announce a partnership that gives African farmers access to the premium coffee market, with the goal of doubling their income from 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 and their families 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. Late at night, after a few drinks, 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 to show me the interest.
Well, it's taken time to get this going, but he was right. If you give people a chance to associate themselves with a cause they care about, while buying a great product, they will. 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 US$50 million for the Global Fund to Fight AIDS, tuberculosis, and Malaria. As a result, nearly 2 million people in Africa are receiving life-saving drugs today.
There is a growing understanding around the world that when change is driven by proper 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 demonstrated 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 just a few examples of where the interest in these activities is growing.
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, and see where you can stretch the reach of market forces to help push things forward.
Whether it's foreign aid or charitable gifts or new products, can you find a way to apply this so that the power of the marketplace helps the poor?
I hope corporations will dedicate a percentage of their top innovators' time to issues that could help people left out of the global economy. This kind of contribution is even more powerful than giving cash or offering 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 and makes life better for the richest, and dedicates some of it to improving the lives of everyone else.
There are a number of pharmaceutical companies, like GlaxoSmithKline, that are already putting their top innovators to work on new approaches to help the poor. Another example is Sumitomo Chemical, who used its expertise to build a bed net factory that it donated.
Other companies are doing the same -- in food, technology, cell phones, banking. In fact, I would say that if other companies in a sector simply matched what the leader in that sector is doing, we would 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 bridges 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.
The task is open-ended. It will never be finished. But a passionate effort to answer this challenge will help change the world.
I'm excited to be part of it.
Q&A following the speech, hosted by World Economic Forum Executive Chairman Klaus Schwab:
Let's make Davos the starting point of a movement of creative capitalism.
Now, so I have one or two questions, being very much involved into this issue intellectually. When you preach creative capitalism or I call it sometimes corporate global citizenship, you meet very often quite some cynicism of people, people saying that's the end, I mean, you have enough arguments, the business of business is business.
Here what would you -- you mentioned already it's a reputation, it's a recognition, but what would you tell those people to go away with this wrong criticism?
Gates: Well, I think that part of the problem we get into is that there are many things that are done under this label that, in fact, don't have a very large impact, and so we have to use the fact that more is going on here, and people are getting more sophisticated about it, as well as the Internet, to really gauge which are the sincere efforts that have a big impact. So, some of the cynicism about this will be reduced as it is mapped sector by sector into more concrete activities.
We also benefit immensely that some of these breakthroughs, it doesn't take much of a change in them to make them available to the poorest. Even sometimes eventually the price just comes down, and there is the benefit there, but sometimes things get stuck because there's an assumption of expertise, there's an assumption your electricity runs all the time, and so the twists that can take it and move it out of just the upper two-thirds down to that bottom one-third may not be a very large deviation.
So, I'm not talking about some radical change; I'm talking about an evolution, and I do think the largest companies are probably the place where the real tradeoff is net positive, and that they should lead the way.
Schwab: Now, very often such an engagement of business into society depends on the personal let's say characteristics of the CEO. How would you see that such a philosophy of creative capitalism is really entrenched into the genes of a corporation
Gates: Yeah, I agree that it's not something that a company is engaged in. Getting onto that path, having a CEO take a strong position and show personal excitement, be willing to take some of the really talented people in the company and give them time to learn about these needs and create special partnerships, that's a very important element to drive this forward.
But if it's done right, the self-image that people have of who they are and what their company is about will come to include this.
The slogan of Microsoft is a computer for everyone, and do we really mean for everyone? Well, yes, even though that's a very difficult thing.
So, I think it could become both inculcated and as it's more measurable over time, then you'll get the processes working on your side, and you won't need the heroic CEO time and time again.
Schwab: Then if I understand you correctly, you would give the advice -- that's my question -- that a corporation is concentrating on a few of such projects, not being all over the plate. And if I understand you correctly, you would also give the advice that a corporation, what it is doing is in line with its own capabilities. Is that correct?
Gates: That's right. I mean, I'm sure that every company will do things like matching employee gifts. That lets the employee have more impact in their personal giving. I'm sure they'll do things in their local communities that are fairly broad.
But when you look on a global basis, when you look at the tough problems of the poorest, a company really should primarily stick to what it knows well: Does it know food, does it know distribution, does it know drugs, does it know media, does it know cell phones? There are, thank goodness, a lot of examples which I think would end up covering virtually all the companies that are here at the forum. But that's where in a sense you're developing something that's lower cost, and you're true to the identity and the expertise of that organization.
Schwab: Such reason when we had this morning the water discussion, the two persons who took the lead were Peters Brabeck from Nestle, and Neville Isdell from Coca-Cola, two companies who have special expertise with water.
Now, one question, in doing so, would you advise a company, if ever possible, to work together with governments -- you hinted at it actually -- and with NGOs? Because sometimes corporations are impatient, and governments have a different style of working, and NGOs have a different style. They are sometimes suspicious. So, how do you see the notion of what very often is called public partnerships, and public-private partnerships in this respect?
Gates: Well, certainly the foundation that my wife and I have has found it extremely important to reach out to private organizations. A lot of those are partnerships with drug companies where they're dedicating some of their best people and taking risks, but we take on some of the financial burden so it's within the reach of what they can responsibly do. For them the opportunity cost is actually the greatest thing that they give, although sometimes there's a financial contribution as well.
So, certainly in an area like health partnerships are absolutely important, and I think in some ways those partnerships validate the impact that can be had. If a corporation can find out a way in these poor countries to do things on their own, there's absolutely nothing wrong with that, but some of the tougher problems -- education, infrastructure, nutrition, medicine -- I don't think it's likely to happen, and so I do think where there's reasonable governance, the government is a good partner, and then there are so many wonderful NGOs that are actually now more open-minded.
Once upon a time, the NGOs had a little bit of a negative attitude towards this, and there was almost this feeling of business that as soon as you got involved, anything you offered had to be free, so it was almost like a tar baby; as soon as you did it, then it was they'd want more than was reasonable, and so companies that stayed away almost got less flack than the ones that got in and got involved. I've seen that -- you know, there's still some of that, but I think the attitudes from both the NGO and the private sector have matured quite a bit.
Schwab: And very often you had the situation where when you work together with partners they look at business mainly as a cash cow, not necessarily as someone who brings in a lot of expertise. They will argue we have ourselves the expertise.
Gates: That's right, but the idea of getting cash directly from companies, it's great, people should push for that. There are people like Shell who just came into the Global Fund with a very significant contribution.
That is an element, but in some ways you're not going to have a breakthrough just by doing it that way. If you talk purely about dollars, the aid budgets, the rich world government aid budgets are the biggest piece of the dollar resources out there. The reason the companies I say that we can take the state of the point and prove it a lot faster than we are today with businesses is mostly that innovation element.
Schwab: Would you see -- you speak about a transformation, a gradual transformation, hopefully gradually in a very fast sense, but what could governments do in order to enhance this transformation, for example, tax regimes or do you see any -- would you have any advice for governments?
Gates: Well, I mentioned in the speech the thing that happened in the United States. It didn't get much visibility, which is this fast track grant in the FDA.
I didn't mention this idea of advanced market commitment, which has now been applied to a particular vaccine for pneumonia and pneumococcal vaccine there's a fund of a billion and a half dollars -- virtually all government money, a little bit of foundation money -- that is out there for any manufacturer that can meet the product specification. And in that case we picked a development that should be reasonably within the reach of a couple of the drug companies, and so it should get them to make the leap to make the modifications to the rich world vaccine to add a few things to it and make it suitable for the developing world markets, and yet be able to tier that so it's not taking away from what they're doing today.
So, advance market commitment is one of the great new ideas, and I think we'll see that applied in a number of new ways.
You know, we have the Doha trade agreement which has some provisions that are to help the developing countries, so it would be kind of tragic if those things can't be resolved. I mean, the benefits of allowing trade over time accrue to be even bigger than a lot of the direct aid that gets done.
Schwab: Let me ask you a last question, Bill. Now you are doing yourself this transition into a new function, and you leave behind a legacy of having transformed the world into I would say an information society.
Now if you look forward at your next career step -- career may be not the right word here -- but at your next life phase, what would you like to see as your legacy in 10, 15 years?
Gates: Of the new work?
Schwab: Of the new work, of your new function.
Gates: Well, I've set very ambitious goals, because I'm quite optimistic. If you look at say the 20 diseases that our global health program goes after, I'd hope that within 15 years over half of those we could have had a very dramatic impact.
Some of them will prove to be harder than others. For example, AIDS we will have made an improvement, but not the dramatic improvement probably in that timeframe. Malaria perhaps, and a number of the other ones we have things in the pipeline.
So, huge change in the mortality rates in the developing countries, which then has this effect of reducing population growth. That's this big benefit that then makes everything like education and nutrition a lot easier.
So, I have very high expectations there, and we actually use these dashboards internally at the foundation to make everything be quite numeric. We're trying to be rigorous about that, and even share those so that people can see, oh, you fell short of what you had in mind, and then we get to explain if we have any lessons that might be learnable from other foundations.
So, I think there are some things about how we go about things that I hope those learnings can have an impact. There is the specific work in different divisions: health, development, and the U.S. education work.
But in 15 years, boy, by then we will have spent a lot of money. At US$3 billion a year, and 15 years, that adds up, and for that people should have a very high expectation of what we can do.
Schwab: Thank you, Bill, for having brought to us this evening a very enlightened view of capitalism. I hope many will follow you. We will facilitate it in any case, because that's the mission of the World Economic Forum. And I'm looking forward to, if I may say so, to welcome you back in your new incarnation next year. Thank you.
Gates: Thank you.