Continuing with the story on Bill Gates, Warren Buffet and other billionaire philanthropists in the Forbes 400 issue, the richest person in the United States adds a commentary on opportunities for philanthropic investment. Gates begins by observing that the market will not provide goods and services without earning a return, which explains why the poorest people on the planet cannot get access to life-saving medicines and other essentials. Investment will focus on innovation that is likely to earn a profit. Gates observes:
In this gap government plays an important role. It can offer services where the market does not and thus provides a safety net. To some extent it also fills in where the market leaves off in funding innovation… But government faces its own obstacles to funding innovation. It generally does not take the long view, because election cycles are short. Government is averse to risk, given the eagerness of political opponents to exploit failure. Unlike the private market, government is good not at seeding numerous innovators but at backing only the ones that make progress.
So when you come to the end of the innovations that business and government are willing to invest in, you still find a vast, unexplored space of innovations where the returns can be fantastic. This space is a fertile area for what I call catalytic philanthropy.
In short, Bill Gates is looking for opportunities to earn big returns in changing the world–to make it a better place.
In chapter 7 of Madmen, Ed and I provide a more formal approach to engaging these exact issues. We argue that:
Whether one tries to change the world by investing one hundred dollars or one hundred million, whether one dedicates an hour of labor or a lifetime, these allocations — like every other aspect of human action — involve tradeoffs. Simply put, choosing how to effect political change is an economic act because it is a decision about how to devote resources among competing alternatives.
Whether implicitly or explicitly, anyone who gives one hundred million dollars to [the Children's Scholarship Fund or some other big endeavor] has a theory that such an investment will yield a better return than the alternatives. It is this theory that drives home the practical implications of our framework. Because, if they are wrong, then these generous philanthropists will not have simply wasted their money, they will have foregone the chance to succeed elsewhere.
Or to quote Jim Morrison: “No eternal reward will forgive us now for wasting the dawn.”