Easterly Tell 'Em

I am not sure if William Easterly knows who Souljah Boy is, but he's doin' it right in his rebuff of some of Bill Gates' rather leftward-drifting comments the other week about how we need a 'new kind of capitalism.' Gates' comments received some media coverage when he made them a few weeks ago, actually. Basically, he said that capitalism as it stands today has no incentive to come up with solutions to better the life of people with no money to buy products or services (all of the x million people living on 'less than $2/day' or whatever metric you like). I've read some of Easterly's past work and mentioned it here (wow, longer ago than I remembered!), and have his newer book queued up on Amazon. His work is often seen as a bit of the flipside to the lofty idealism (of the 'give a zillion more dollars in aid and Africa's problems will be solved' variety) seen in Jeffery Sachs' well-known book that I covered in this post.

A relevant segment from Easterley's WSJ piece follows (although I recommend reading all of it, particularly the commentary on favoring of specific industries at the end):

Mr. Gates seems to believe that the solution is to persuade for-profit companies to meet the poor's needs by boosting the "recognition" of corporate philanthropy. But the dossier of historical evidence to suggest this would work is as thin as Kate Moss on a diet. First of all, the recognition motive has proven to be awfully weak compared to the profit motive. Otherwise we would have had a lot more than the $5.1 billion of annual American corporate philanthropy to the Third World (as of 2005, which has the most recent reliable figures). That was four one-hundredths of 1% of the $12.4 trillion of U.S. production for the free market. Is it really the poor's only hope that the Gap will donate a few pennies per sexy T-shirt for AIDS treatment in Africa?

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.