Thursday, February 7, 2008

Trade or aid? (amv)

Bill Gates is all-famous, not only for being the founder of Microsoft and hence for becoming one among the wealthiest men on this planet, but more recently for his philanthropy, for his fight against poverty, especially in Africa. Now, William Easterly has published a book in 2006 on the success of foreign aid. The title speaks for itself: The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good. It come as no surprise that Mr. Gates cannot agree with Easterly's conclusion that the masses are lifted from poverty not by benevolence but by profit-seeking activity. To say it with Adam Smith:
“It is not the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.”
This was written in 1776 (in the same year the Declaration of Independence was signed. Both shared a common intellectual heritage) and came to be known under the heading "The Invisible Hand." Mr. Gates, a truly great entrepreneur who has done more for mankind by producing software than by donating the fruits of his efforts, disagrees with Easterly on the following:

The market may serve those who can pay, but bluntly ignores those who cannot afford to do so, those who are in most desperate need for the goods and services produced. This statement is true as far as it goes. Yet, it does not go so far. Demand is, of course, a prerequisite for the existence of economic value giving capitalism meaning and purpose. Demand is an outgrowth and determinant of scarcity and scarcity is what economic activity is all about. And demand has to be dressed in monetary outlays, otherwise the system is blind to it and ignores the needs expressed. And since Africa is poor, that is, since it cannot signal demand by the ability to spend, the world market directs little attention to the people suffering most from poverty.

However, all demand depends upon supply! Not only Africans but all of us have to engage in productive activities to satisfy our ends, that is, we have to serve others by adding our one endowments to the stream of goods and services flowing towards the satisfaction of other consumers. Demand is not the restriction, but supply. For capitalism did not grew strong by mere spending out of nothing, but by the interaction of demand and supply, by demand made possible by supply. Production is the essence of capitalism and the source of our riches, although demand gives meaning and direction to the entire process. In other words: Africans are not poor because capitalism simply ignores them, but because you generally cannot take out of the system without engaging yourself and therewith contributing to others within the system (gifts depend on someone others contribution; this is also true for theft and taxes). Your income increases the better your abilities are in serving others better and cheaper. Your abilities, however, depend on the width and the depth of the capital stock you can be attached with.

If you want to take measures against AIDS or other diseases (as done also by Prof. Sachs) that's fine, as long as you do not believe that it will make a significant contribution to the poor's living. But if you want to make a real change, you have to eliminate all restrictions to the accumulation of capital by the process of saving and investment (including foreign savings and investments). Once capital is free, Mr Gates will see that capitalism is not the enemy of the masses but their closest ally. It is capitalism to which we owe mass production and thus the supply of various goods affordable to the poorest. After all, even low-income groups in capitalist countries have access and make use of Windows! But let Mr. Easterly have the final word. In his reply to Mr. Gates he writes:

"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. Foreign direct investment in Africa today, although rising, amounts to only 1% of global flows. That's because the environment for private business in Africa is still hostile. There are some industry and country success stories in Africa, but not enough.

[...] Sure, let those who have become rich under capitalism try to do good things for those who are still poor, as Mr. Gates has admirably chosen to do. But a New-Age blend of market incentives and feel-good recognition will not end poverty. History has shown that profit-motivated capitalism is still the best hope for the poor."
Nature is a niggard! It is capitalism which shifts the burden of scarcity!