This is an alternative view of the social value of Microsoft versus the social value of the Bill and Melinda Gates Foundation. Two comments follow.

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COMMENTARY
Bill Gates's Charitable Vistas
By ROBERT BARRO
Wall Street Journal
June 19, 2007; Page A17

Bill Gates is the richest man in the world, helped create a revolutionary computer
software company, and earlier this month collected an honorary degree from
Harvard University. But he may not understand the vital role wealth creation plays
in society.
In collecting his degree, Mr. Gates delivered a commencement address that focused
not on the information age, the rise of personal computers or the relentless
efficiency his software has brought to nearly every industry. Instead, he focused on
his own personal philanthropy. His implicit theme was that so far what he has
accomplished may have been good for him and Microsoft shareholders, but it has
been no great contribution to society. He suggested that with a personal fortune of
about $90 billion (including what he has transferred to his foundation) it is time for
him to give something back.
I find this perspective hard to understand. By any reasonable calculation Microsoft
has been a boon for society and the value of its software greatly exceeds the likely
value of Mr. Gates's philanthropic efforts.
Here is a sketch of a simple model of Microsoft's social value. The market value of
the company's stock recently hit $287 billion. In 2006, its revenue was $44 billion,
with earnings of $13 billion. This money was generated by creating something
consumers value. Only Microsoft's competitors could believe that this much market
value, revenue and earnings would have been created by delivering products that
have little value to society.
Suppose that a copy of a new version of Windows sells for $50 (and is typically
charged as part of the price of a personal computer). Microsoft's revenue from
Windows would then equal $50 multiplied by the number of copies consumers snap
up. Microsoft's earnings are the revenue less production and development expenses.
But that's not the social value. That comes from the increase in productivity created
when businesses and households use the software. The social benefit equals the
value of the extra product, less the total paid for the software. Almost by definition,
the benefit has to be positive. Otherwise, why would consumers willingly pay for
Windows?
A conservative estimate, in a model where software serves as a new variety of
productive input, is that the social benefit of Microsoft's software is at least the $44
billion Microsoft pulls in each year. When capitalized with the same ratio (22) that
the market applies to earnings, this flow corresponds to a valuation of $970 billion.
Thus, through Microsoft's future operations, Mr. Gates is creating a benefit to the
rest of society of about one trillion dollars -- or more than 10 times his planned
donations. And this counts only the likely future benefits, giving no weight to the
past.
Mr. Gates has pointed out that it's difficult to give away such a large sum of money
in a productive way. This isn't exactly true. He could cut a $300 check to everyone
in the U.S., or donate the money to the U.S. Treasury with the aim of reducing the
national debt. The last method is easier but has different effects on income
distribution.
But Mr. Gates's plan is, instead, to use the Bill and Melinda Gates Foundation to
reduce world poverty, with an emphasis on advances in health. This is a noble goal.
But it will likely just supplement the much larger existing programs of aid and debt
relief that have been carried out for many years by international organizations and
governments. These programs have, at best, a checkered record. Although Mr.
Gates is probably smarter and more motivated than the typical World Bank
bureaucrat, he likely won't do much better.
To find policies that are likely to alleviate poverty, it is best to look at actual
successes and failures. In recent decades, the biggest single accomplishment is the
post-1979 (post-Mao) economic growth in China. Xavier Sala-i-Martin ("The
World Distribution of Income," Quarterly Journal of Economics, May 2006) finds
that the number of persons below a standard poverty line fell in China by about 250
million from 1970 to 2000. This massive poverty reduction occurred despite an
increase in the Chinese population of more than 400 million and rising income
inequality within China. The second-best story is the economic growth in India,
where the poverty count fell by around 140 million people from 1970 to 2000.
Also illuminating is the greatest tragedy for world poverty -- the low economic
growth in sub-Saharan Africa. In this case, the number of people in poverty rose by
around 200 million from 1970 to 2000.
These examples suggest that the key question for poverty alleviation is how to get
Africa to grow like China and India. An important clue is that the triumphs in
China and India derive mainly from improvements in governance, notably in the
opening up to markets and capitalism. Similarly, the African tragedy derives
primarily from government failure. Another clue is that foreign aid had nothing to
do with the successes and did not prevent the African tragedy.
One reason for this is that foreign aid is typically run through governments and,
thereby, tends to promote public sectors that are large, corrupt and unresponsive to
market forces. Perhaps the Gates Foundation will run more efficient aid programs
than we've seen in the past, but I wonder.
Ironically, Mr. Gates's inspiration to "give back" apparently comes from the world's
second richest person, Warren Buffett, who recently promised to donate much of
his fortune to the Gates Foundation.
I say ironic because one can make a much better philosophical case for a give-back
of Mr. Buffett's $52 billion than for Mr. Gates's $90 billion. Mr. Buffett's money
came mostly from being a good stock picker. Whether his fortune is the product of
luck or skill, the social benefits are hard to pin down. These benefits have to derive
from improving company management practices or investment decisions.
Of course, Mr. Gates is free to do what he wishes with his $90 billion. But I think
he is kidding himself if he believes that the efforts of the Gates Foundation are
likely to provide society anything like the past and future accomplishments of
Microsoft. And, frankly, I would have preferred to get the $300 per person "Gates
Grants."

Mr. Barro is an economics professor at Harvard University and a senior fellow at
the Hoover Institution at Stanford University.

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http://economistsview.typepad.com/economistsview/2007/06/robert_barro_bi.html

http://delong.typepad.com/sdj/2007/06/mark_thoma_is_i.html