Bill Gates Doesn’t Understand Why He’s So Rich

It’s too bad that Bill Gates doesn’t understand that one of the main reasons he is a billionaire is because of the legal and property rights systems in the first world countries. He claims he wants to help the world’s poor, but first he should understand why he was able to grow so rich.

At the World Economic Forum meetings in Davos, Switzerland, Gates called for “creative capitalism” to help the poor. It isn’t exactly clear what Gates intends, but as Declan McCullagh of CNET writes, it “seems to center around companies spending money (or taking on money-losing projects) that are seen as socially desirable. To Gates, it’s ‘market-based social change’ that amounts to ‘doing work that eases the world’s inequities.’”

Charitable efforts should be applauded, but if Gates really wanted to help the world’s poor, he would need to better understand capitalism and why some countries stay poor. McCullagh continues:

What’s a little disappointing is that Gates missed the opportunity to make a crucial point: that the reason poor countries remain poor and their citizens can’t afford life-saving drugs is not that they receive insufficient charity on the part of wealthy nations.

The reason is that governments in the poorest countries are corrupt, nondemocratic, and repressive. Property rights are not secure, denying would-be entrepreneurs the chance to take out loans against their homes to raise capital. Court systems are nonfunctional, limiting individuals’ ability to enter into contracts with one another. Foreign aid is diverted by corrupt officials to Swiss bank accounts (in sub-Saharan Africa alone, the amount diverted was $150 billion in 2005). Food aid depresses prices, undercutting local farmers.

Those reasons, not “noncreative capitalism,” tend to be the root causes of poverty and misery in those unlucky nations. Adam Smith, the father of modern capitalism, figured this out more than 200 years ago when he wrote: “By pursuing his own interest, (a businessman) frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”

A better quote from Adam Smith is this one from An Inquiry into the Nature and Causes of the Wealth of Nations, “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.” (Book 1 Chapter 2).

Poor countries don’t need “creative capitalism.” There is plenty of creativity in these unlucky countries waiting to be unleashed. What is needed is decent government and institutions that let the butcher, the brewer, or the baker flourish. As Hernando de Soto (“The world’s greatest living economist” according to Bill Clinton) writes in The Mystery of Capital, the world’s poor already have capital. The total assets of the poor in Haiti, for example, are 150 times greater than all the foreign investment received by Haiti since 1804. The poor, however, lack the ability to sell or trade their assets legally because the property and legal system in the poor countries discriminate against the poor.

Poor people need the same type of property and legal institutions that allowed Bill Gates to get rich in the United States. In The Mystery of Capital de Soto include this about Bill Gates:

How many software innovations could he have made without patents to protect them? How many deals and long-term projects could he have carried out without enforceable contracts? How many risks could he have taken at the beginning without limited liability systems an insurance policies? How much capital could he have accumulated without property records in which to fix and store that capital? How many resources could he have pooled without fungible property representations? How many other people would he have made millionaires without being able to distribute stock options? How many economies of scale could he have benefited from if he had to operate on the basis of dispersed cottage industries that could not be combined? How would he pass on the rights to his empire to his children and colleagues without hereditary succession? [p. 224]

I don’t know who has Bill Gates’ ear, but I wish Hernando de Soto did. To really help the poor of the world, the poor need governments that don’t steal from them and good property and legal system.

Creative capitalism is fine. Isn’t going to solve the problems of the world’s poor. All creative capitalism really will do is make rich philanthropists feel better about themselves.