Transformational Capitalism

"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." (Bill Gates, World Economic Forum, Davos, Switzerland, 1/24/08)

Approaching retirement from his beloved Microsoft next summer, Bill Gates, in an address to the World Economic Forum, recently provided a glimpse behind the curtain of what will be occupying his energy in the next fifteen years. We already know about his partnership with Warren Buffett in the Bill and Melinda Gates Foundation, but in this speech he has sketched out a view regarding the role of the modern corporation in the transformation of the world economy. In his view, we must better serve the one billion on the planet who are unable to buy anything and are left off the escalator of rising expectations for capitalism to realize its transformational possibilities and the potential of tomorrow’s market.

Describing what he calls, creative capitalism, a system in which "…government, business and nonprofits work together to stretch the reach of markets forces so that more people can make a profit or gain recognition doing work that eases the world’s inequities,” Mr. Gates goes on to add, “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 so ever 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."

The speech continues in a colloquy between Bill Gates and the founder of the forum to set out examples of leveraging by corporations of expertise to reach below a market threshold to extend benefits and raise those below the market into a position where they have the tools to begin the upward mobility which has characterized creative capitalism’s presence in different parts of the world. I strongly recommend to corporate officers and board members the full speech for their attention. There is much to consider in it to fashion the effective corporation of today not just tomorrow. Even small companies can make an investment in their long term welfare by considering the broader implications of their activities and seek to do good while doing well.

My only criticism of his words is that he has mischaracterized his proposal as “creative capitalism” which is to shortchange what it really is. Transformational Capitalism is what the joining of efforts he envisions will produce, and I suggest the substitution of that term. Most capital markets are creative, but the Gates’ vision is truly transformational and should be properly designated as such.

There were a few dissenting notes in the wake of the speech particularly by those who feel that business’ sole function is to provide product and service to make a profit, but in my view Bill Gates speaks to the proper ordering of efforts by the sectors of society. His proposal should be embraced by all capitalists. Given the thwarted aspirations of much of the world’s poor, the adoption of this mission is the right thing to do and is justifiable on that basis alone. It should also be considered the conservative approach by corporate directors charged with the welfare of their companies. To do less risks ill fashioned and harmful incursions into the board- room by government and disappointed shareholders who expect more. We here in the United States are in another election cycle, and the candidates are voicing the same platitudes regarding change without changing a thing in the formula they preach. Must we choose between big government making promises that it cannot fulfill, or an absence of organized effort by society to harness the creativity and skill of which we are possessed to deal with the problems that confront us? Must we just muddle on not making a dent? I think not. The environment of transformational capitalism leaves to each to do what it can do best. We have seen the limits of government and the effectiveness of NGO’s working with private citizens and business in our Gulf Coast following Hurricane Katrina. Partnership of the sectors is effective in the developed world and can be even more so in the undeveloped.

Five years ago, along with men and women of distinction here and across the country, former Dean Rudd of the College of Charleston School of Business and Economics and I founded The Free Enterprise Foundation to educate the public on the symbiotic relationship between our basic liberties and the free market system. I was appalled at the ignorance by a significant portion of our citizens of our heritage and wanted to harness our history to a national reawakening of what has been invested in us by our ancestors. I hoped our activities would forever keep the call of the Liberty Bell alive in our land. We meant to encourage continuing excellence and best practice while reminding the public and business of what is at stake by deviation from the ethical path charted for us by our ancestors.

Early on I was confronted by the abuses that have occurred down through history by both government and unethical enterprise. As I rolled what I was trying to achieve around in my head, I thought, “What did we mean by free enterprise? Well, we meant ethical free enterprise. OK, did that mean you don’t cheat your customer or your supplier? Yes, but more; it meant that businesses in a community were ethical with each other and actively involved in encouraging their workforce to be engaged useful citizens for the communities in which the companies operated. In the past five years we have made a down payment on that goal, but much remains to be done.

In addition to what is now a long list of columns in this great newspaper, we have held an annual award luncheon that recognizes leading citizens in our state whose lives are shining examples of ethics and civic responsibility. Henceforth, we will also undertake to compile an honor role for companies not only here in South Carolina but nationally that publically embrace The Gates formula for Transformational Capitalism in their statement of corporate mission and their practices. We will attempt as well to evaluate and publicize those that succeed as well as those that need to try harder with hope that we can over time help to achieve a higher level of stability and welfare by all of the world’s people not only those who have already succeeded . Like Bill Gates, I am an inpatient optimist. The future beckons, and we must seize the great opportunities sketched by his vision for our better tomorrow.

Copyright © 2007 by Robert E. Freer, Jr. All rights reserved

About the author: Robert E. Freer, Jr. is President of The Free Enterprise Foundation. He is a Visiting Professor, at The Citadel and elected in 2005 to be their first John S. Grinalds Leader in Residence. A regular contributor to the Mercury, He can be reached by E-mail at The Citadel . Copies of his earlier columns can be found The Free Enterprise Foundation.

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