Matthew Bishop, Co-Author, 'Philanthrocapitalism: How the Rich Can Save the World'

December 11, 2008
Matthew Bishop, Co-Author, 'Philanthrocapitalism: How the Rich Can Save the World'

Just as you didn't need a weatherman to know which way the wind was blowing in the 1960s, you don't need a compass to figure out which way the markets have been heading in 2008. Indeed, with only a few weeks left in the year, the S&P 500 is on track to record its worst annual performance in more than eighty years, and the Dow is not far behind. Credit markets around the globe are frozen or in disarray. And wherever you look, once-mighty blue-chip companies are disappearing almost as quickly as the polar ice cap.

Not the best time, perhaps, to argue that ours is a golden age of philanthropy and suggest that billionaire-philanthropists like Warren Buffet, Bill Gates, and George Soros "are leading a revival and reinvention of an old tradition that has the potential to solve many of the biggest problems facing humanity today." But that's precisely what Matthew Bishop, New York bureau chief for The Economist magazine, and co-author Michael Green, have done in Philanthrocapitalism: How the Rich Can Save the World, and their conclusions are provocative, interesting, and likely to be talked about for years to come.

Recently, Philanthropy News Digest sat down with Bishop at the midtown offices of The Economist to talk about the book, philanthrocapitalism and the current economic crisis, the growing concentration of wealth in the United States, and the role of philanthropy in a democratic society.

Before joining the magazine, Bishop was on the faculty of the London Business School, where he co-authored three books for Oxford University Press. He also has served as a member of the Sykes Commission on the investment system in the twenty-first century, was a member of the advisors group of the United Nations International Year of Microcredit 2005, and has been honored as a Young Global Leader by the World Economic Forum.

A graduate of Oxford University, he lives in New York City.

Philanthropy News Digest: You're credited with coining the term philanthrocapitalism, so who better to define it for us than you. What is philanthrocapitalism, and how does it differ from traditional philanthropy?

Matthew Bishop: Well, it has two definitions. One is very broad and has to do with capitalism as a force for good and playing a positive role in society. Throughout history, we see periods of great wealth creation producing not just enormous amounts of money for individuals and society at large; we also see individuals who made fortunes trying to give back to society by looking for and funding solutions to some of the social problems of their day. And, of course, we're seeing that again today.

The better-known definition has to do with high-profile business leaders and entrepreneurs, the wealth creators, becoming philanthropists and then applying their head for business to their charitable giving. It's not just about writing a big check, or building a monument to oneself, or giving and not really caring about what happens with the money. It's saying, "Well, how do I combine my giving with my talent and the abilities that made me wealthy? How do I put those to work to solve some of the huge problems facing society?"

PND: Would you consider Carnegie, Rockefeller, Julius Rosenwald, and other Gilded Age tycoons to be philanthrocapitalists?

MB: I would, and your question suggests that, in a sense, there's nothing new about this. In fact, as we explain in the book and on our Web site, philanthrocapitalism goes back to Tudor England and England's emergence as a global military and economic power. What's striking about that era is that the philanthropy of the day reflects the business innovations of that period. For example, the first Tudor merchants invested heavily in new schools and hospitals, which had been the monopoly of the church up to that point. Later, in the eighteenth century, English capitalists invented the joint stock company, which led to the joint stock market and, eventually, this thing called joint stock philanthropy, in which people actually sold subscriptions to wealthy people. In the late nineteenth and early twentieth centuries, wealthy capitalists such as Carnegie and Rockefeller created these great vertically integrated companies and also created institutional philanthropy at the same time.

"...[T]oday's capitalism is...probably the most productive and, in some ways, the most democratic capitalism we've ever seen...."

What's different about today's capitalism is that it is probably the most productive and, in some ways, the most democratic capitalism we've ever seen, and the philanthropy it has spawned reflects that. It's reflected in its use of information technology, in its focus on brands and mass personalization, in all sorts of things that allow it to be more effective in dealing with the issues we face as a society.

PND: The book considers many different kinds of philanthrocapitalists, from entrepreneurs such as Bill Gates and Ted Turner, to investors like George Soros and Warren Buffett, to former presidents and figures from the world of entertainment. What do they all have in common?

MB: There's been a tendency for people to narrowly define what we mean by philanthrocapitalism. By that I mean people tend to define it as an obsession with metrics, with measurement, with trying to generate revenue, if not profit, from their giving. What we wanted to show in the book was that the people who have made fortunes during this most recent capitalist boom have done so in a wide range of industries and realms using a variety of approaches. But when it comes to philanthropy, they all tend to operate in this new space located at the nexus of traditional business, government, and the nonprofit sector. They're trying to apply some of the skills and talents that served them extraordinarily well as they were making their fortunes to their giving. Take someone like Christopher Cooper-Hohn, a hedge-fund billionaire who is famous for his use of research and analytics and uses a very metrics-driven approach to his giving. Or someone like Ted Turner, who, as I found out when I interviewed him, is rather impulsive. Ted will consider something for five minutes and then make a decision — even a decision to give a billion dollars to support the United Nations, which is something he decided in a car on his way to an event where he was making a speech because he wanted to have something attention-grabbing to say. Or Bill Clinton, who has this tremendous charisma and ability to connect with other celebrities. He can call someone up — anyone, really — and that person will take his call. Clinton knows that and has used it to leverage hundreds of millions of dollars in philanthropic pledges.

PND: Well, let's talk about leverage. What is it? And do today's philanthrocapitalists use it differently than philanthropists have used it in the past?

MB: By leverage, we simply mean getting more bang for your buck. Even Bill Gates, whose foundation gives away $3 billion a year, doesn't have very much money compared to government or big business. Three billion a year is roughly a third of the annual education budget for New York City. In other words, it's a drop in the ocean, and unless it's used more intelligently than government and other institutions use their resources, it won't have much of an impact. That's why philanthrocapitalists put an emphasis on leverage. Many philanthrocapitalists see public-sector money in terms of vast, dumb expenditures. Using a systems-thinking approach, they look for bottlenecks in the system where a relatively small amount of money can loosen things up; or they look for a tipping point where a little extra bit of money can push things over the edge.

PND: As you've noted, great booms in philanthropy are driven by great booms in wealth generation. Unfortunately, over the last six months or so we've witnessed wealth destruction on a staggering scale. Do you think philanthrocapitalism can survive a meltdown of the global financial system?

MB: The first thing I would say is that the need for philanthrocapitalism is going to be greater than ever coming out of this financial crisis, for two reasons. The first is that government budgets are going to be severely constrained, and a lot of nonprofits that have relied on government contracts are going to have to look elsewhere for revenue. Secondly, in such an environment it is going to be more important than ever that every philanthropic dollar is used as efficiently as possible. One of the main arguments of the book is that philanthrocapitalists do a better job of that than other people.

I also believe that the people who are going to get through this financial meltdown the best, by and large, are going to be the super-rich — in part, because many of them were well-connected enough to see the writing on the wall and to get their money out before the markets went into freefall. Indeed, if you believe the old saying, "The time to invest is when there is blood in the street," then many of the rich will come through this wealthier than ever. The question I have — and it's the challenge I find myself talking about every time I'm interviewed about the book — is whether the rich and super-rich know that this is their moment, their time to show leadership and step up to the plate, philanthropically speaking. Or are they going to say, "My investments took a hit and my net worth has gone from $10 billion to $8 billion, so it's time cut back and lay low." That's a real question. And I get worried when I talk to some of the philanthropists I know and hear them saying things like, "We understand we should stick to our plan, but like everyone else, we're feeling the pain." The natural reaction when you're feeling the pain is to hunker down.

"...the one thing that will turn this crisis into a calamity is if we let populist, class-warfare-type politics get the upper hand...".

So, this is a critical juncture for philanthrocapitalists, and the point I make to them is that the one thing that will turn this crisis into a calamity is if we let populist, class-warfare-type politics get the upper hand. That could happen. You saw some of it in the presidential campaign, and again when Treasury Secretary Paulson announced his bailout plan. In fact, I could see Congress passing regulation next year that would harm the economy, both the wealthy and everybody else, and philanthropy. So, what I say to philanthropists is, you've got to recommit to society and show that you are a positive rather than a negative force. If you do that, then maybe we'll get this whole thing back on the tracks before there's too much suffering. Warren Buffett understands this, and I hope other people will follow his example.

PND: You applaud philanthrocapitalists for taking a systems-thinking approach to problem solving. But what evidence do we have that systems-thinking yields results when applied to a social context?

MB: One of the things that has happened over the past twenty years is that a lot of talent in society has migrated to the business sector — talent that in the past would have gone into politics or law or medicine. Of course, money is a powerful inducement. But people also want to do work that feels cutting-edge, to solve problems and make a difference. They want to create the next Google, the next amazing new technology; they feel that with hard work and a little luck they can shape the course of whole economies. And that feels great, that's exciting.

But the idea that all this talent is turning its attention to addressing big social problems raises, for me, a couple of questions. First, anyone coming from the business world into the social sector has to navigate significant cultural differences. For example, people in the business world too often are maniacal about control. There's this arrogance, especially among executives, that they know best and that people in the nonprofit sector don't know what they're talking about. Similarly, on the nonprofit side, you have people who resent wealthy capitalists who have made a boatload of money for themselves and are now coming in and telling them what to do. We hear these stories all the time. So, there's quite a lot of disrespect on both sides of the divide, which is a bad place from which to start.

What is encouraging is that the most effective of the philanthrocapitalists have not only demonstrated their commitment to the social sector, a number of them have had a kind of epiphany and realize that they need to be more humble and listen more. In fact, that's something the new economy encourages; it's the whole venture capital thing about not really being a success until you've failed at least once. At the same time, the people on the receiving end of the money are more aware that there's a lot of money out there waiting to be tapped, that there's a quid pro quo attached to it, and that they're going to have to get used to the idea of participation, beyond a check, from the person providing the funding. Again, people are starting to figure out how to make it work.

The other concern I hear a lot is that, initially at least, philanthrocapitalists are looking at social sector work as a profit opportunity. Now, there may be profitable business models out there and ways to make social enterprises more sustainable. That's just going to be the case in some situations. But in other situations, that whole agenda is completely inappropriate. What we'd like to see, instead, is business people applying business approaches to social problems, approaches that allocate capital efficiently and strive to generate impact, that emphasize investment in capacity and sustainability and don't skimp on overhead. Revenue should always be secondary.

PND: You spend a lot of time in the book talking about Bill Gates, Warren Buffett, and the Bill and Melinda Gates Foundation, the largest philanthropy in the United States and one of the largest in the world. The Gates Foundation has four trustees: Bill and Melinda Gates, Bill Gates, Sr., and Warren Buffett. Are you concerned by the concentration of so much wealth in a single tax-exempt institution controlled by just four people?

"...Bill Gates and Warren Buffett do not have to give their money away; they could spend it or leave it to their children or move it offshore...."

MB: First, let me just say that Bill Gates and Warren Buffett do not have to give their money away. They could spend it or leave it to their children or move it offshore. So, it's a good thing, in my view, that they've chosen to invest it philanthropically, and clearly their motivations for doing so are good ones. They feel extremely fortunate, they want to give back to society and make a difference, they want to solve problems, and they don't have any interest in undermining the democratic process.

That said, there are two aspects of the Gates-Buffett merger that merit discussion. To your point about the growing concentration of wealth in American society, there is a real question about whether would it have been better for Buffett to have given his money to another foundation, or to have created his own foundation, in the interest of competition. There is a feeling in some quarters that the Gates Foundation could become monopolistic in some areas. Not in the sense of having a massive amount of capital to allocate, because clearly the money that governments are able to spend will dwarf even the $3 billion that the Gates Foundation plans to spend every year, but monopolistic in the sense that anyone who has got a bright idea in, say, the global health arena may feel that they have to go to Gates or try to keep Gates happy. So, yes, there's a question about whether it would be better to have two big foundations in the global public health arena competing for ideas and human capital rather than one giant one.

The other question has to do with Bill Gates' personal influence on what the foundation decides to invest in, which is going to be huge. In that sense, he is going to have an outsized role in setting the global public health agenda, and that does raise some issues. For example, ten years ago the world had given up on eradicating deaths from malaria. Today, in contrast, eradicating deaths from malaria within a decade has become one of the world's top public health priorities, thanks in large part to Gates. Now, eliminating deaths from malaria is a good thing, but it's not necessarily one that the public health community has felt was the best use of resources. But Gates has been able to shift the agenda, and that has created some political waves.

It also has gotten the attention of other philanthrocapitalists, more and more of whom are willing to take on politically charged issues. Take Pete Peterson, the Wall Street financier who has established a foundation with the express purpose of trying to get America and Americans to confront our growing budget deficit and the entitlements crisis headed our way. Not only is the Peterson Foundation advocating for budget reform, it also wants to reform Social Security and health care in this country, both of which are huge, politically charged issues. Quite frankly, I'm glad people like Gates and Peterson are stepping up in this way. I'm glad they're putting their money to work in the interest of society and doing so in a sincere way. George Soros is another one who has been willing to weigh in on controversial issues and put his money to work in service of those issues, whether it's AIDS or criminal justice reform or the need for more development assistance and debt relief for developing countries.

As we argue in the book, however, the danger of this kind of advocacy is that it could lead to a backlash from people worried about a return to the bad old days of plutocracy. And it's absolutely critical we avoid that. Fortunately, philanthrocapitalists have been very transparent about what they want to do and have chosen to make themselves accountable in important ways to the public to ensure that they have support for the things they are trying to accomplish. Those activities aren't just confined to this country; that kind of transparency is especially important in countries that are recipients of philanthrocapitalist largesse. It's absolutely crucial to building stronger civil society in those countries, most of which desperately need a more robust civil society, but it's also really hard to do. If you don't do it, however, you will never have legitimacy. And without legitimacy, you're just another imperialist coming in and telling people what they should do. We all need to recognize that fact and not wait for the debate to happen, because at that point it's probably too late.

PND: You note in the book that income inequality in America is growing and that wealth increasingly is being concentrated at the top of the socioeconomic pyramid. Do you think philanthrocapitalism exacerbates or mitigates the anxiety caused by those trends?

MB: Both, probably. In the book we go so far as to argue for a new social contract between the super-rich and the rest of society and point to the mistake made by the first generation of philanthrocapitalists, the Gilded Age tycoons we talked about earlier. Economists back then thought you could have periods of wealth creation or periods of wealth redistribution, but that you couldn't have both. Indeed, America has veered alarmingly from one extreme to the other through much of its history, with both suffering as a result. By that I mean we are less wealthy as a country than we might have beenand we have seen less wealth going to solve society's problems.

"...We have a new global economic system, and that system, for a variety of reasons, is very good at creating wealth...."

But we have a new global economic system. And that system, for a variety of reasons, is very good at creating wealth. And as it creates wealth, it's also going to create a class of super-rich. That's the nature of a winner-take-all system; the market allocates a large slice of profits to a few winners, which, in a global system, means you end up with a lot of billionaires. But if we focus our energies on cutting billionaires down to size, we're also going to slow down the process of wealth creation. By the same token, if the super-rich don't give back to the society that made them wealthy, then we're going to see the kind of backlash I mentioned earlier; the super-rich will find themselves demonized by politicians and the media, and you'll start hearing terms like "robber baron" being thrown around again. That's why I think the example set by Warren Buffett is such an important and uplifting one. When the second-wealthiest man in the country commits to giving away the bulk of his fortune, people pay attention. It's an example we can all learn from.

PND: You mention in the book that philanthrocapitalists are very focused on the concept of return, both financial or social. Do you believe social return on investment is something that can be measured?

MB: I'm not sure. But I think the act of trying to measure it is important. Sure, we're a long way from having anything that measures it the way we measure profit. But efforts to quantify and assign a value to social return — and having discussions about what works and what doesn't work — are absolutely critical to any attempt to improve society. Without them, you're just shooting in the dark. I understand that it's difficult to do and that some things are more easily measured than others. But we have to try, and things like the triple bottom line are steps in the right direction. We may have a way to go, but I do believe we will get there.

PND: What advice would you give to a young entrepreneur who has just sold his or her company for a large sum of money and is thinking about becoming a philanthropist?

MB: Well, the first thing I would do is to remind that young person that he or she has benefited enormously from a system that allows individual talent to flourish and rewards individual effort, sometimes beyond a person's wildest dreams. And, I would add, now that you find yourself in that position, philanthropy — giving back to society — should be an important part of your life.

Secondly, philanthropy is not just about giving money away. It's about giving money away effectively and having an impact on a particular problem or issue. And my advice on that score would be to take your time; philanthropy should be a lifelong commitment. So, yes, start early, but don't feel that you have to write big checks and make an immediate impact on day one. It's been interesting to watch Google founders Sergey Brin and Larry Page be criticized for taking too long to start making significant philanthropic investments. Part of that, I think, is because they are being judged on Internet time. But the problems they actually hope to address — climate change, ending our dependence on coal and oil, encouraging entrepreneurship — are large and complicated. As Warren Buffett is fond of saying, "It's much harder to give money away effectively than it is to make it," and I think those guys and that organization have taken his words to heart. I'm happy when people who are serious about being philanthropists do a little experimenting before they start to put their chips on the table. Go ahead. Take your time. Think through the impact. Be open to risk taking. Look for things that could make a difference but may have difficulty raising funds. Celebrate your successes and learn from your failures. Be transparent. Do it right.

PND: Crystal-ball time. How do you think the global economy and philanthropy is likely to change over the next ten years?

MB: Well, it's a difficult moment in which to make predictions, and I think it's quite possible that policy makers could make some decisions over the next six to twelve months that could send the global economy into a severe tailspin. I don't think it's likely to happen, but it's a possibility.

That said, I do believe how the rich and super-rich behave over the next six to eighteen months will play a big factor in how things go. If they show leadership, as Buffett has been doing, as Bill Gates is doing, then maybe the policies our political leaders adopt in response to the crisis can be shaped in a way that helps those who need help the most while getting the extraordinary wealth-creation engine of the last twenty-five years back on track. Globalization is good, more integration of the world economy is good, and we want to continue to see hundreds of millions of people in China and India and other developing countries lifted out of poverty.

"...I expect to see philanthrocapitalists become an ever-more visible force in society...."

At the same time, I expect to see philanthrocapitalists become an ever-more visible force in society, both as role models for all those who dream big dreams and will stop at nothing until they succeed and as reliable partners with government and the nonprofit sector in trying to address some of the big social and environmental challenges we face, whether it's climate change or poverty alleviation or delivering decent, affordable health care to every human being. You know, two of the signal foreign policy achievements of the Bush administration, the President's Emergency Plan for AIDS Relief and the creation of the Millennium Challenge Corporation, both came out of philanthropy and are both being driven by new wealth. My hope is that, early on, President-elect Obama will convene important philanthropists from the United States and around the globe and say, "You folks have an important role to play in addressing the big global challenges we all face. So, what do you say we sit down and focus on how we can do a better job of aligning your interests with the policymaking process." In fact, I fully expect there to be a more formalized role for philanthrocapitalists in the global system that comes out of the current economic crisis.

PND: And when do you think The Economist will change its name to The New Economist?

MB: [Laughs.] We'll have to see.

PND: Well, thanks for your time, Matthew.

MB: Thank you.

Mitch Nauffts spoke with Matthew Bishop in November. For more information on the Newsmakers series, contact Mitch at mfn@foundationcenter.org