Leveraging Philanthropy

The cover of this week’s Economist features Bill Gates holding what appears to be a very healthy third-world child, with the headline, “Billanthropy.” The two articles inside discuss Warren Buffett’s decision to donate over $30 billion to the Bill and Melinda Gates foundation, which roughly doubles the Gates Foundation endowment.

Mr. Buffett followed his own investment advice in choosing to donate to the Gates Foundation, allocating his money to the foundation that gives the biggest bang for the buck. It doesn’t surprise me. If I had $30 billion to donate to charity, I’d give it to the Gates Foundation, too, and I didn’t need Mr. Buffett to tell me what was the most effective charitable foundation around. I knew it from the first 1998 announcement that the Gates Foundation was donating $100 million to fund vaccine distribution in developing countries.

I wasn’t always a Bill Gates fan. I went to college in a town where WordPerfect and Novell were big employers, and Microsoft was the enemy, the big bad monopolizer throwing its weight around and killing the competition. For me, Bill Gates personified scheming greed, more than Gordon Gekko in "Wall Street." All that was wiped away the day I read in the paper about that first donation.

It was one of those moments that you remember, for the rest of your life, exactly where you were when you heard—or in this case read—the news. The timing was weird, as the newspapers took pains to point out. The New York Times stated, “The donation…comes as he is battling Government antitrust charges in Federal District Court in Washington,” implying that this might be just a big public relations effort. But I needed no persuading. I walked around in a daze, with the newspaper tucked under my arm and tears of wonder dotting my eyes. *

I have never seen in print the precise reasons that so overwhelmed me, so I share them with you now. They were fresh I my mind, as I had just taken a course by Gary Becker in “Human Capital and Development.” Human capital has been described as “personal productive capacity,” or “human competence.” It is the education, training, or even physical health which individuals use to produce or earn a living. It cannot be transferred or used by anyone else, because it resides in one’s own person. Gary Becker wrote the book on it, as well as “A Treatise on the Family,” an economic analysis of the family, and some papers describing the implications of both for developing countries.

By investing in vaccinations for children, and in research on eradicating major causes of death in developing countries (as Gates has since done), one raises life expectancy in these countries. It saves lives, which is always mentioned in the papers, but they don’t mention the ways the increase in life expectancy multiplies throughout the economy. When children are more likely to survive to adulthood, parents choose to have fewer children, and invest more in each one. As a result children receive better nutrition and more education. This effect continues into adulthood: the longer you expect to live, the bigger the payoff for investing in your own human capital. Education becomes much more important to everyone. Furthermore, the increase in life expectancy raises the importance (the returns) of all sorts of investments in developing countries; from local wells to national elections, the local population has a higher incentive to care about and reinforce the investments being made in their country.

All of these effects compound each other, moving a country from a stagnating third-world nation to a new dynamic state of a robust, growing economy. That’s the theory. The weak link here, of course, is the ability to develop stable government institutions in places wracked with violence. Yet increased life expectancy still has the right effect. It makes war and violence much more costly all around, by raising the value of the alternative.

These are the things I reflected on when I heard about that first vaccination donation. I had never thought about how to give away money, but it was clear that Bill and Melinda Gates had. They had spent at least six years studying, giving away relatively tiny amounts to local causes before going global health, and have been scaling it up every year since. It’s just what you would expect from the world’s richest capitalist. He wasn’t just going to give away more money than any industrial titan in history. He was going to leverage it, and by so doing improve the world more than anyone else in history.

*Yeah, so I'm sensitive. What of it? It's not very often these days that I feel like the world is getting to be a better place.